The IRS just released its audit statistics for the 2020 fiscal year, and fewer taxpayers had their returns examined compared with prior years. But even though a small percentage of returns are being chosen for audit these days, that will be little consolation if yours is one of them.
The IRS has hired about 2500 new auditors as part of a $40 billion package passed by Congress. This includes 2,000 agents to the Small Business team and another 500 to the Criminal Enforcement team. They are gearing up to conduct many more audits in the coming year, so it’s important to be prepared if you are audited.
Don’t panic just yet. Let’s take a look at the details behind this hiring spree and find out what it means for taxpayers.
Why Is The IRS Hiring So Many New Auditors?
The IRS has explained that part of the hiring boom is a result of losing 17,000 auditors over the past ten years. The Biden administration and other lawmakers are cracking down on tax reform for those who may have a large income.
The $40 billion package was specifically designed for higher-income citizens. Lawmakers are trying to diminish the tax gap or the difference between what the IRS thinks it should be earning compared to what is actually received.
Biden proposed hiring up to 5,000 new IRS auditors to bring in an additional $700 billion in tax revenue.
What Does This Mean for Taxpayers?
The IRS will have the workforce review and audit more returns this year in fitting with its increase in employees. Typically, the IRS usually only audits a small number of returns (a rate of .6%). However, companies may find that the audits performed for 2021 end up closer to a rate of 1%. With the IRS ready to make a more significant number of returns, some people who have been staying under the radar with their taxes may no longer be able to.
How Does the IRS Choose Which Returns to Audit?
The way the IRS chooses which returns to audit is not easy to define. However, the IRS says that they use two methods when they review an audit.
The first method uses a statistical formula comparing a return to similar returns, keeping an eye out for red flags.
The second method audits returns that are related to a return the IRS has already chosen to audit. For instance, if your business partner is chosen for an audit, it’ll be more likely you are audited as well.
The IRS states that being chosen for an audit isn’t an indicator that something is wrong. However, the fact that a return is audited means that the IRS identified some red flags, whether it’s some inconsistency or irregularity with the return.
Some of the following aspects might create some red flags for the IRS:
- A significant home office deduction
- A large amount of claimed charitable donations
- A large number of business expense deductions
- Unreported income
- Mathematical errors
- Only using round numbers when the return is filed
This list is a small list of possible reasons for the audit. There are also different types of audits that the IRS performs.
The lowest audit level is the correspondence audit. The IRS usually sends a taxpayer a letter asking for additional documentation. If the taxpayer can provide this information, you can usually resolve this audit easily. But, if the IRS isn’t satisfied with the taxpayer’s response, it could cause an office or field audit.
An office audit is conducted at the local IRS office. Minor issues with a return typically cause these audits. The agent assigned to the audit will ask you to physically come into the office and bring specific documents that they request. The agent will ask you to explain any issues with the return. So, it’s essential to prepare for this audit well.
A field audit is the most invasive type of audit. An IRS auditor comes to your home or business to conduct this audit. These audits are typically reserved for significant issues with a taxpayer’s return. In some cases, an attorney might convince the auditor to conduct a field audit in their office, reducing some anxiety about the situation.
Are You Being Audited?
If you find these tax changes overwhelming, we have good news. We can help.
Perhaps you’re still on the fence about hiring a professional. If you are unsure of your tax obligations and don’t want to face the increasingly higher risk of being audited, hiring a tax management professional like the experts at Lloyd & Hodge can be a life-saver.
We can help you with tax management, planning your expenses and reducing your tax obligation throughout the year. In addition, Lloyd & Hodge offer a variety of accounting services, including bookkeeping, payroll, cashflow & budgeting analysis, and personal bill pay.
If you’re tired of muddling your way through your finances or simply don’t have the time to properly manage them, contact Lloyd & Hodge today and let us handle the heavy lifting and number crunching, so you can get back to work.