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Filling late to decrease chance of an Audit???????????


mrichman333

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So my Sch.C guy told me one of the reasons he files at the last minute is he believes it lowers his chances of an Audit.

What do you think?

I think people are nuts and anything they don't want to do increases their chances of being audited.

I have heard many people ask, when I tell them they will have to get an extension, "But won't that increase my chances of being audited?"

That's when I say, "Pssshhh, I get an extension every year and prepare my own return in June. Or September. Whenever I feel like it. And you're not doing anything wrong, are you? If you get audited, they probably owe you, right? Bring it on!"

Then they go home and think about all the money they didn't report and miles they made up and worry. But they got an extension anyway.

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There used be a rationale along the lines that returns filed in Sept - Oct miss the cutoff for audit selection based on the current year and get thrown into the mix for the following year. Not omitted, but simply batched with the succeeding year.

Assuming incomes, complexity of returns, and number of returns filed increase each year, then someone whose return was on the MARGIN for the current year might drop below the cutoff point for the succeeding year. That would apply to someone with a marginal DIF score, but would not apply to someone selected for a random audit or compliance audit. It would also not apply to someone selected because of a specific item on their return which needed clarification. The only compliance audit I've ever worked on was a return filed in March, but I don't attach any significance one way or another to that.

I even heard some people with IRS say that was probably true, but there's no way to prove or disprove it. After all, the exact methodology is a closely-garded secret. Anyhow, from a statistical standpoint the argument made sense. The odds might be lowered a little, but there would be no certainty attached.

I have seen some returns filed on extension that I just KNEW would be audited, but it never happened. But I've seen the same thing happen with returns filed by Apr 15. If one had access to all the data, it would be interesting to evaluate the known risks associated with extending the SOL by 6 months vs the benefit of a slightly decreased audit potential (assuming there is anything to the idea in the first place).

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My colleague is 20+ year retired IRS manager and he doesn't even know who selects which tax returns to get audited. When he first started, they would just hand him the file, when he became a manager his superior would hand him the files then he would hand down to the agents. He now been retired for more then 15 years now.

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If I were in charge of selecting returns for audit, I'd weigh the selection heaviest on returns which were filed on Apr 15. I believe that is where the greatest number of errors are made, as last-minute filers are rushing to "get something filed" at the 11th hour. Wouldn't surprise me to find 75% of errors by taxpayer AND preparers occur in those golden hours around Apr 12-15.

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If I were in charge of selecting returns for audit, I'd weigh the selection heaviest on returns which were filed on Apr 15. I believe that is where the greatest number of errors are made, as last-minute filers are rushing to "get something filed" at the 11th hour. Wouldn't surprise me to find 75% of errors by taxpayer AND preparers occur in those golden hours around Apr 12-15.

Probably the same would be true about the returns on extension and Oct 15.

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IRS Audit Rate Hits New Low

The Internal Revenue Service is anticipating the chances of a tax return being audited to be the lowest in years.

The IRS audited less than 1 percent of individual tax returns in 2013, the lowest rate since 2005, and the number of individual returns that will be audited this year will decline even further, IRS commissioner John Koskinen told theAssociated Press. Thanks to successive rounds of budget cuts at the hands of Congress, the IRS has been forced to cut back on its audits. “We keep going after the people who look like the worst of the bad guys,” Koskinen told the AP. “But there are going to be some people that we should catch, either in terms of collecting the revenue from them or prosecuting them, that we’re not going to catch.”

Last year, the IRS audited just 0.9 percent of individuals who earned less than $200,000 a year, the lowest rate since 2005. The odds of being audited were more likely for high earners, but while 10.9 percent of individuals who earned $1 million or more were audited last year, that was the lowest proportion since 2010.

An average of 0.6 percent of business tax returns were audited last year. The rate was much higher for large corporations, with approximately 16 percent of corporations with assets of over $10 million subjected to audits. To compensate in part for the cutbacks in budgets and manpower, the IRS is increasingly relying on technology to catch mismatches between the income that individuals report on their tax returns and the information reports that are filed by their employers, banks and other businesses. However, Koskinen would like to see Congress pass the Obama administration’s proposed increase in the IRS’s budget. According to the administration, the IRS takes in $6 for every $1 added to its enforcement budget. But with opposition to the IRS rampant in Congress in the aftermath of scandals tied to the so-called “targeting” of Tea Party groups, the agency is likely to endure another round of budget cuts next year.

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"There used be a rationale along the lines that returns filed in Sept - Oct miss the cutoff for audit selection based on the current year and get thrown into the mix for the following year. Not omitted, but simply batched with the succeeding year."

I think that is the rational, but he doesn't have that kind of understanding of the process, so he must have heard it some place

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I think we should start a top ten list of ways to avoid an IRS Audit.

Be self-employed and have 30,000 business miles.

Be self-employed, have three kids, and net income of $13,500 - 17,450.

Be self-employed and lose money every year. Every. Year.

Have a day job and a farm that loses money every year. Every. Year.

Give away your yard sale crap that is worth thousands.

Wink. Wink.

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"There used be a rationale along the lines that returns filed in Sept - Oct miss the cutoff for audit selection based on the current year and get thrown into the mix for the following year. Not omitted, but simply batched with the succeeding year."

I think that is the rational, but he doesn't have that kind of understanding of the process, so he must have heard it some place

He claimed to have worked in the statistical analysis side of IRS, where someone would know this sort of thing. But there was no way to confirm this, and lots of people make all sorts of claims to make themselves look important or to sell books. But from an analytical point of view, the rationale made sense to me. Every process has its deadlines, limitations, and weaknesses.

Also, this was back before the e-flinging days, so even if it was true then, it may no longer apply.

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So my Sch.C guy told me one of the reasons he files at the last minute is he believes it lowers his chances of an Audit.

What do you think?

Make him feel smart by agreeing with him....but point out random audits.

Personally....I think that's an old wives tale....carried over from the days of paper returns.

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Also, this was back before the e-flinging days, so even if it was true then, it may no longer apply.

Yeah, that's the important thing, the modern filings are so different in terms of how they process them, that the old ideas just don't play anymore. Used to be they were flooded with complex paper returns filed on 4/15 and so if they audited X% of those, it helped your odds. Today, with electronic returns, the way the pick has much less to do with WHEN it came in, and it's much easier for them to sort and choose based on the contents. Plus things like math errors, which used to be a significant indicator of an amature, are virtually nonexistent today.

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Tell him the truth. The very fact he is a schedule c makes him more likely to be audited than anything else in the tax code. I had an agent tell a client this year the only reason they were audited is becuae they filed a sch c.

at .9% audit rate, there is no "more likely" that will be statistically relevant. DIF scores have been the reason for all the audits we have helped with at the firm for the past 3 years.

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Audit-Misconception #2

"Each year I file my tax return around April 15th

because it reduces my chances of being audited."

This misconception, started a few years ago by another tax author, was based on an erroneous assumption about the IRS's computer system.

During the processing routine all tax returns are scored or rated for audit potential under IRS's top secret computer program called DIF, for Discriminant Function. The higher the DIF score, the greater the potential of bringing in additional taxes under the audit. The IRS strives to audit the higher-scored returns first BECAUSE of the expectation of getting more revenue for government coffers. DIF scores are developed from an analysis of a series (involving up to 50,000 randomly selected returns) of intensive audits, conducted every few years, called the Taxpayer Compliance Measurement Program (TCMP). In a TCMP audit, the IRS will analyze every item on the tax return, including proof of income. (DIF scores therefore reflect correlated averages found on a cross-section of tax returns.)

The assumption behind this misconception is that a cut-off score of 240 may be the high cut-off score in February when fewer returns are filed, but 260 may be the cut-off score in April when more returns are filed. Therefore, if your DIF score is somewhere between 240 and 260, then your chances of being audited are lessened by filing in April when everyone else files.

This misconception is based on a poor understanding of how returns are selected for audit. The selection process does not even begin until after the end of June, over two months past the end of the April 15 deadline. The first step occurs when computer-selected returns are arranged in batches of examination class, a method used to categorize returns by the amount of income reported. All returns are placed into one of 12 classes based on their total positive income (TPI) for individuals or total gross receipts (TGR) for businesses. (See Exhibit 5-3 in Chapter 5 for a breakdown of each TPI and TGR category, the number and percentage of returns audited and the average tax and penalty recommended per return in each category.)

Throughout the year, district IRS offices place orders with the IRS service centers for returns to audit. The service center then pulls those returns that are above a specific DIF cutoff score and sends them to the district office. Districts are required to order returns numerous times over a twelve-month period so that all tax returns, regardless of their filing date, have an equal chance of being delivered to the district for classification,a manual selection procedure performed by revenue agents called classifiers.

Another aspect of the selection system is the actual classification process. The IRS requires that the highest DIF scores within each examination class be pulled and manually screened for audit potential by the classifier. A high DIF score is "any return with a score above the median score delivered for each examination class."

If it appears to the classifier that the tax return is in order or that you have included sufficient substantiating or appropriate documentation with the return, the return will most likely be sent back to the service center without being audited. The classifier relies of his or her experience, judgment, and instincts to analyze the returns to find the ones with the greatest likelihood of change.

This interesting part of this whole process is that while the classifier receives a high Dif-Score return, the various items on the return that resulted in the high DIF score are not identified. Therefore, the classifier must decide what items on the tax return will be questioned during the audit. More than any other non-DIF factor, the classifier's decision is the most significant variable in the selection process. See Exhibit 0-1 for IRS guidelines to classifiers on how to identify significant issues when selecting returns for audit.

Agents with classification experience have stated that subjective factors frequently enter into the selection process. For example, one classifier selected returns that were sloppily prepared, or ones that had a lot of rounded numbers in the expense columns (for example, $25,000 for travel expenses instead of $24,679). Another agent stated he selected returns that were prepared by certain commercial tax preparers.

The fact is you cannot influence your DIF score, and you should not try by fooling around with the expense figures on your return. But you may be able to influence the classifier's decision and reduce your chances of being audited by following this simple rule that may turn out to be the single most important audit-proofing strategy rule in the entire book:

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I once had a client who farmed on the side. He kept excellent records. After fifteen years or so of losses he got audited. He never even called me coming in the following year to say he had been audited. In astonishment I asked him how it went. He advised a nice young lady had come down from Richmond staying a couple of hours and left and sent him a REFUND check for $54.00 dollars for gasoline used on the farm. He had an onsite tank which he never told me about and that was that. :P

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