Last month the IRS announced that the number of audited returns had increased by 11 percent over the previous year, with the agency examining more than 1.58 million individual returns during its budget year, which ended in September. The press release further stated that the more income you had, the better your overall chances were of being audited, as wealthy taxpayers and big businesses were the most likely to be called in. More than 8 percent of returns listing incomes above $1 million were audited. Charities and other tax-exempt organizations also received more scrutiny. And it worked. According to Steve Miller, IRS deputy commissioner for services and enforcement, "The bottom line shows enforcement revenue topped $57 billion, up almost 18 percent from last year."
However scary those numbers may sound, the good news is that the total number of audits conducted last year represents only a little more than 1 percent of the 143 million individual returns the IRS received. Yet if you watch TV or listen to the radio, you can't help but notice the ads from companies willing to help you get out of tax trouble. This burgeoning industry is not necessarily the result of audits, but of individuals who don't file tax returns at all or who fail to list all their income that has been reported to the IRS. If you try this, rest assured you will hear from the government.
Tax rules aren't difficult. You almost have to go out of your way to get on the bad side of the IRS. Still, far too many people think they can cheat the system. A few months ago, a new client came into the office, handed me his tax information, and announced that he wanted all of his withholding back. But while his paperwork indicated that he made only about $16,500, he was trying to claim business expenses of almost $27,000. That didn't include his normal living expenses, including rent, food, clothing, and the like. He claimed that the difference had been paid out of his checking account, but in looking over his checking account statements, I discovered that he had deposited more than $53,000 during the year. Obviously something was not right.
Claiming more in expenses than you report in income is begging to be audited. An examiner normally requires that you bring your bank statements to the audit. Although tax preparers don't have to ask for proof of a client's statements, the IRS is very specific about a preparer's responsibilities. The rules for tax practitioners state: "The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete."
The possibility of fraud was so obvious in this case that I actually thought the client might be an IRS plant (the IRS does periodically scrutinize tax preparers). As tax evasion is a felony punishable by five years in prison and a $250,000 fine, I wasn't willing to help him. I told the client that I couldn't prepare his return.
Learn the rules and follow them. You usually can't get into trouble if you tell the truth and file your returns on time. Those ads on TV should be all the proof you need that despite your cleverness, you will be found out.