MINNEAPOLIS (WCCO) — With one week to go until the deadline to file 2011 income tax returns, none of us wants to hear from the Internal Revenue Service with the dreaded message: “You’re being audited.”
It’s what happened to Matt Weber and his wife.
“We got a notice about a year later saying — you’re being audited,” said Weber.
He and his wife do their own taxes using tax preparation software, he said. It took three years to fight with the IRS, haggling over documentation for various deductions.
“It’s not fun,” he said.
According to the IRS, just about 1.1 percent of all individual returns end up being audited. In 2011, it was about 1.5 million returns.
And those audits aren’t generally random, according to tax experts.
“They’re generally triggered by something in the return,” said Scott Kadrlik, managing partner at Meuwissen, Flygare, Kadrlik & Associates, in Eden Prairie. Kadrlik is also a member of the Minnesota Society of CPAs.
His first trigger is Schedule C filers, people who file as sole proprietors of businesses.
“My wife has an independent business selling jewelry, so that’s part of it,” said Weber.
Kadrlik said, because most of us have our incomes directly reported to the IRS through 1099 forms from our employers, “high cash businesses are generally going to be looked at.”
The IRS uses the 140 million tax returns to generate norms for incomes and norms for deductions for every imaginable type of business. If your filing is out of the norm, you’re more likely to get a closer look.
“Our charitable contributions are always high, so that gets flagged,” Weber explained.
Kadrlik agreed, noting that high charity deductions are another trigger, because they are easy to fake.
“They want to see the detail behind that. What you’re deducting, and what support you have for that deduction,” he said.
Taking a deduction for a home office can be another red flag.
“If you’re not using that exclusively for business, you probably can’t deduct it,” said Kadrlik.
But statistically, the top trigger for an audit is your income level. Again, the overall audit rate is 1.1 percent. But among filers making more than $200,000 in income, the audit rate is 4 percent, according to the IRS. For filers reporting more than $1 million in income, the audit rate is 12.5 percent.
Auditors want to make it worth their time.
“It’s an easy place to go to audit,” laughed Kadrlik.
There’s no evidence that self-filers are audited at a higher rate than those who use a professional to file their taxes, said Kadrlik. However, a professional can often catch and double-check the red flag items before you file.
For Matt Weber, the major cost of being audited was the time it took to argue with the IRS over email. It took three full years. Ultimately, he and his wife gave in and gave up.
“We ended up just agreeing to what they wanted,” he said.
Now, he says he’s a little paranoid that he’ll open his mail and find another package from the IRS.