According to the IRS Data Book, the IRS audited nearly 1.1 million tax returns in 2017. That is approximately 0.5 percent of all returns. Although it may not seem like a considerable number, don’t raise your glass in victory too soon. The IRS has a few folks on their radar, and sometimes it is not because one did anything wrong.
Why the IRS may audit you
The IRS not only collects the financial data of all the world, but it also continues to get more sophisticated at manipulating that data. It is not difficult for the IRS to identify patterns. One such trend that the IRS looks out for is any taxpayer who is traditionally non-compliant.
Here are a few examples of the non-compliant:
- Small businesses
- High-wealth taxpayers
- International taxpayers
- Estate, gift, and trust returns
Sometimes we are guilty merely by association!
Here are a few IRS statistics, from Accounting Today, on who experienced an IRS audit:
[table id=TaxAudits /]
[table id=13 /]
The cost of an audit has the potential to be staggering
The accuracy penalty can add 20% to your tax bill. Of course, if fraud is proven, money is the least of your worries as you can be incarcerated. What many fail to realize is much of the costs for an audit is the revision(s) of the original tax return. One needs to ask why we are making corrections in the first place.
For many, the reason is simple—they failed to comply with the ever-evolving tax laws. What was true last year may not be true this year. The error may have been an oversight or an honest mistake. However, the IRS will demand that the problem is rectified. All of this negatively impacts your financial position (not to mention the stress one may feel as the IRS is close enough to kiss you on the cheek!)
Be Proactive, not Reactive
There are a couple of questions to consider. Where do you want to end up? What is your desired outcome? As good as these questions are, waiting until the end of the year to review your financial picture is not wise. If you want to minimize the chance of an IRS audit or at least be prepared for the audit, it would be prudent to meet quarterly with your tax professional. Planning in advance will ensure you are making the necessary course corrections before you get too off-track. It will also lend itself to a clear strategy of getting you from here to there.
It does you little to no good at all if your tax professional is uneducated or not up-to-date with all the tax revisions made in the Tax Cuts and Jobs Act. If your tax professional does not have knowledge of current IRS standards or procedures, you are also in danger of leaving money on the table that you never knew existed because your professional was ignorant of new tax regulations.
Please contact us if you have any questions regarding proactive tax strategies. CAPATA is a full-service accounting firm that has been located in Orange County for more than three decades. Our suite of services has grown to include: Corporate & Individual Tax, Bookkeeping, Virtual CFO Services, Audit, and Tax Litigation. Contact us for a financial review of your current situation and to help you strategize for the upcoming year.