Anatomy of an Audit
In July 1861, the Federal Income Tax was instituted with the aim of helping the government fight the civil war. After paying taxes, you may exercise the fear of being audited. There is no need for alarm as the possibility is pretty slim.
Total Audits Performed Each Year
In 2009, the total returns filed stood at 138,949,670. The total audits conducted stood at 1,425,888 while the percentage of audits were only 1.03%. By 2010, the total tax returns filed was 142,823,105 while the total audits conducted were 1,581,394 and the percentage of audits was 1.11%. By 2011, total returns filed stood at 140,837,499 while total audits conducted stood at 1,564,690 and the percentage of audits was 1.11%.
Audit Rates by Tax Filing for 2010
Through the audit of corporations, the IRS recovered over $250 million while $1.8 million was recovered through the audit of other companies.
For individuals earning over $1 million, 32,494 audits were performed amount to 8.4%, for individuals earning between $200,000 and $1 million, 120,481 audits were performed amounting to 2.7% while for all individuals, 1,581,394 audits were performed amounting to 1.1%. For individuals earning less than $200,000, 1,428,419 audits were performed, amounting to 1%.
For corporations with assets over $10 million, 10,207 audits were performed, amounting to 14.2%. For assets under $10 million, 19,127 audits were performed amount to 0.9% while for all businesses, 58,067 audits were performed amounting to 0.6%. For S-Corporations and Partnerships, 28,733 audits were made accounting for 0.4%.
For large companies with assets over $250 million, money recovered per hour of auditing stood at $9,354 while for smaller companies it stood at $1,025. It is worthy of note that the US tax code that contains all the laws governing tax is made up of words numbering close to 4 million.
Types of Audits
The Mail Audit: This is a letter from the IRS requesting an explanation or additional information and backup documents. When taxpayers receive an adjustment notice, they think they are being audited.
The Correspondence Audit:This requires tax payers to provide documentation supporting a specific claim made on their tax report or any other check. In 2010, 78% of those who were audited were done through mail correspondence.
Interview Audits: Sometimes, tax payers may be required to appear in person at the IRS office to tender documents to support their tax payment.
The Field Report: In this case, the IRS agent goes to the home of the business owner or his business premises, this is the case for business operated from home or small business.
Signs That Your Are Getting Audited
1. As compared to last year, you have made more money.
2. When you forget to file a form.
3. When you work for yourself.
4. When you claim losses from a hobby. Pretending a hobby is a business and writing off all related expenses is illegal. When a business is entered into, it must be conducted with the expectation of making profit.
5. When you deduct home office or vehicle related expenses as this is often done incorrectly.
6. Including expensive meals as cost of entertainment in your deductions.
7. When you appear to be generous in a particular year, the search light of the IRS will surely go on you. The IRS is particular of anyone who claims to donate about $500 or just under that amount as anyone who donates that amount must file form 8283.
8. When you maintain an overseas bank account or the numbers do not seem to add up, you will be under the search light of the IRS.
How Long to Keep Paperwork
You need to keep the copy of your federal tax return (Form 1040 or 1040A along with all scheduled and forms forever as this provides a permanent record for your financial history.
All other records like receipts, back up documents, state tax returns up to a full four years. The IRS and other tax agencies have a period of up to three years to audit or revise the return.
It is worthy to note that during that 1990s it took three weeks on average American to work and pay their state and federal taxes while today it takes at least four months to do so. In 2010, 45% of US house holders do not owe any income taxes.
For the no-tax household, they paid other forms of tax such as local income tax, sales tax, property tax as well as FICA payroll tax from social security and Medicare on the federal level.