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Tax Tips Tuesday: Audit Worries Shouldn’t Keep Taxpayers from Claiming Valid Tax Breaks

H&R Block advises timely response to IRS notices could mean avoiding additional penalties

IMG_5987By The Tax Institute at H&R Block

The federal government estimates it has a $450 billion tax gap, which is the amount the IRS estimates is missed in tax collections. One way the government tries to close that gap is through IRS audits of those suspected of having underpaid.

In 2012, the IRS collected $10 billion from audits and examinations. H&R Block (NYSE: HRB) advises that even with an atmosphere that includes more people of more modest means being audited, taxpayers shouldn’t be afraid to claim all the tax breaks they qualify to claim.

Who is being audited and why?

The profile of a potential audit candidate has shifted from the rich to include people who make far more modest incomes. Of the nearly 1.5 million audits conducted in 2012, 2 in 3 were of people who made $50,000 or less. These are some common reasons the IRS contacts taxpayers:

  • Unreported income, inconsistencies – the surest way to get a letter from the IRS is to not report all income
    • A document-matching program makes it easy for the IRS to check income reported on tax returns against what is reported by employers, banks, brokers, etc.
    • The IRS also compares the type and size of deductions taken by taxpayers in the same income bracket to find inconsistencies in areas including mileage and charitable donations
    • Claims for questionable business expenses and a majority of cash business transactions on the Schedule C
      • Eligible expenses can include advertising, insurance, legal services, vehicle expenses, employee wages and taxes, home office expenses and depreciation.

What should a taxpayer do when contacted by the IRS?

While tax season is January through mid-April, audits are conducted year round. The IRS may contact a taxpayer as late as three years from the filing date. However, contact may be very soon after the return is filed if an item is flagged for some reason, such as a document-matching error.

Taxpayers who get an audit notice in the mail should contact their tax professional immediately as delays could result in additional penalties and fees. Most audits are correspondence audits conducted via mail; resolving the matter may be as simple as sending supporting documentation to the IRS. In any case, it is important to respond to the notice promptly. If a face-to-face meeting is required, some taxpayers may elect to have their representative attend without them. In the end, if the taxpayer disagrees with the auditor’s findings, the results of the audit may be appealed.

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