Unopened envelopes and other common causes for an IRS audit

Fran Coet
Special to Colorado Community Media
Posted 3/18/20

In what now seems like another life, I worked for the Internal Revenue Service. Yes, that most commonly hated and feared agency, the IRS. And I worked there initially as a Taxpayer Service …

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Unopened envelopes and other common causes for an IRS audit

Posted

In what now seems like another life, I worked for the Internal Revenue Service. Yes, that most commonly hated and feared agency, the IRS. And I worked there initially as a Taxpayer Service Representative - a person who answered telephone calls from taxpayers who wanted assistance with their income tax issues.

One of the more memorable calls (and one that I can actually recount in a family publication) went something like this:

“I got a letter from you in the mail,” the caller began.

“Okay. Can you tell me what the letter says?”

“I don’t know,” he said. “I haven’t opened it yet.”

I kind of get the fear of the IRS but taxpayers have to do their part, too: Like opening envelopes with the IRS as a return address.

If you take the perspective that IRS is nothing more than the world’s largest and most efficient collection agency, some of their actions may be easier to understand. And, like a collection agency, they sometimes have to audit their “customers’” accounts, which leads us to the topic of today’s column: What are the best ways to avoid a tax audit?

First, don’t ignore those envelopes that arrive in your mail after the first of the year that say (on the outside of the envelope) “Important Tax Document,” as the chances are IRS was copied on that information.

Most IRS audits these days are generated by computer programs - algorithms - which create correspondence to taxpayers for a multitude of issues. One of these is the “matching” program. Third parties, like employers, banks, brokerage houses, customers, etc., are obligated to report items of income and certain transactions (such as sales of stock or real property). The most common reason for attention from IRS is omitting or failing to report those items of income that IRS receives from third parties, or reporting items in a way that is not recognized by the algorithms.

Another common cause of an audit is trying to prepare your own return when life gets complicated. If you have a simple return - one or two W-2s and you use the standard deduction - using the “free file” option on the IRS and state websites is probably okay. But people’s financial lives get complicated. Employers may reward them with stock options. Or they buy a home, or a second home, they invest in stocks, bonds or mutual funds, or they start businesses. How all of that is properly reported and taxed can get complicated quickly, and the IRS can recognize an amateurish attempt to manage those complications.

Finally (and selfishly), I would really like taxpayers to properly vet their hired preparers. I recently had an attorney contact me on a child support modification. The father, who was to pay child support was asserting that his income had dramatically dropped. When I reviewed his company’s tax return for 2018, I found that the balance sheet did not balance. Then I compared the tax return to the client’s accounting records, and I discovered that the preparer had duplicated an expense in the amount of $113,000. Not only did the client proceed to attempt to reduce his child support on the basis of the tax return, but he placed himself in harm’s way with the IRS.

If you hire someone to prepare your tax return, ask them questions, ask to see any licenses or certifications they claim to have, and how much continuing education they had in the past year and from where. Think of the information you are handing them!

There is no way to “audit proof” your tax return, but there are certainly ways you can proactively protect yourself from the big, bad IRS.

Fran Coet is a partner of ATLAS CPAs and Advisors in Westminster, www.AtlasCPAs.com.

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