How to Avoid Being Audited
Gather unto you all your W-2's, your 1040's, your Schedule C's, D's and SE's, depreciations, amortizations, and profit and loss statements, for the Day of Reckoning is close at hand. That special day when we render unto Caesar a percentage of our incomes, minus charitable contributions, IRA's, work related travel expenses, and unreimbursed photocopying at Kinko's.
By and large, the majority of Americans pay their taxes, if not eagerly, at least on time and with a minimum of complaint. Our motivation stems in equal part from our willingness to fulfill our civic responsibilities and an abject fear of being audited. We are all terrified of the Internal Revenue Service, and with justification.
In 1997, in testimony before the Senate Finance Committee, former IRS Agent Jennifer Long spoke of the "egregious" methods used by IRS Revenue Agents and "encouraged" by IRS Management. "These tactics", she stated, "are used to extract unfairly assessed taxes from taxpayers, literally ruining families, lives, and businesses, all unnecessarily and sometimes illegally."
In response to the barrage of injustices revealed at those hearings, Congress passed the IRS Reform and Restructuring Act in 1998, the most extensive revision of the agency's structure in history. The Act created an IRS Governance Oversight Board to eliminate abuses, established the position of National Taxpayer Advocate, and limited the powers of the IRS' Examination and Collection Division. With regard to collection procedures, taxpayers were, for the first time, granted specific due process rights. Congress also restricted the use of the draconian examination techniques so familiar to those of us who have been audited, and granted taxpayers specific rights to sue the IRS when it exceeded its mandate. So for some Americans, the promise of a kinder, gentler IRS was fulfilled.
But not for all of us.
Audit rates for the taxpayers with the lowest incomes have increased by a third since 1988, while falling 90% for the wealthiest Americans. You might suppose that the tax returns of highest wage earners would be the most vigilantly scrutinized by the IRS, but the reverse is true. The less money you make, the more likely it is that you will be audited.
According to an ongoing study conducted by Syracuse University, the overall chances of your tax return being audited fell to 1 in 200 last year, down from 1 in 60 in 1996. But those statistics belie the new strategy of the Internal Revenue Service, which is now focused disproportionately on the working poor, who are now more than 5 times as likely to be audited as anyone else.
If you earn more than $100,000, your chances of being audited fell to a new low of 1 in 100 last year. On the other hand, if you were one of the roughly 20 million Americans who applied for the Earned Income Credit, you chances of being audited were 1 in 75. 1999 marked the first year in which the poor were more likely than the rich to be subjected to an IRS audit.
We can thank former House Speaker Newt Gingrich for the intensified focus of the Internal Revenue Service on those taxpayers who earn the least. Gingrich, together with a group House Republicans, was outraged by tax fraud. Not the kind of loophole you can drive a Mercedes through, but potential misuse of the Earned Income Credit, a program that returns government money to low income working families with children. As a result, taxpayers who apply for the Earned Income Credit now constitute 44% of all IRS audits.
I've said this before, and it bears repeating. According to a former IRS Agent Jennifer Long: "The IRS will often pursue a taxpayer who is viewed to be vulnerable. To the IRS, vulnerabilities can be based on a perception that the taxpayer has limited formal education, has suffered a personal tragedy, is having a financial crisis, or may not necessarily have a solid grasp of their legal rights."
Obviously, the more money you earn, the better equipped you are to deal with the IRS. You have access to the best tax advice money can buy, are able to take advantage of the fine print in the tax code, and ultimately utilize the best methods of minimizing your tax liabilities. And should you be audited, you can afford to hire the legal expertise necessary to fight back, a remedy not available to the working poor.
Indeed, IRS Commissioner Charles O. Rossotti admits that within the agency, there is widespead "fearfulness of pressing cases against taxpayers... whose lawyers or accountants threaten to invoke a portion of the 1998 Restructuring Act, which mandates the firing of any IRS employee for committing any of 10 specific acts that constitute harassment of a taxpayer."
What recourse do the rest of us have? Save every piece of documentation you need to itemize your deductions, and by all means, hire a tax preparer, it will save you money in the long run. And yes, don't cheat on your taxes. Take it from me, life after an audit is hardly worth living.