Tax Audit Trigger Myths: What Won't Bring the IRS to Your Door
After employing certified public accountants to do my income tax returns for many years, I switched to preparing my own returns by hand two years ago. And two years running I have gotten an official Internal Revenue Service envelope a month or so later with a note informing me I had made an error... and enclosing an additional refund check large enough that if I had dropped it on the street, even Bill Gates might have bent over to pick it up.
So the first casualty among tax audit myths is the one that says a letter from the IRS about a problem with your return is bound to contain bad news. In fact, about one in 20 field audits of returns resulted in no change at all to the return last year, according to IRS statistics. Some changes, based on my experience, were in the taxpayer's favor, but the IRS doesn't say how many.
Audit lore is rife with mystery and myth and the IRS likes it that way. One tool the agency uses to pick audit candidates is an algorithm that figures differences between a given return and a model representing similar returns. This is referred to as the DIF or Discrimination Information Function and if you could discriminate exactly how it functions you could sell that information for a lot of money. What they say is that if your income is, say, $100,000, and you report $50,000 in mortgage interest while other returns report $10,000, that could trigger a closer look. But who really knows?
Nobody outside the IRS, if they can help it. Take a look at the redacting in this public document under heading "21.5.2.4.23.6 (05-07-2009)" which describes when returns that bypass DIF scoring should be marked for examination. This is where open government runs up against bureaucratic pragmatism. As to other myths:
E-filing. One audit myth holds that electronic filing will reliably whistle up the audit fairy. Not so, says Factoidz. In fact, the opposite may be true because e-filed returns are likelier to be free of arithmetic mistakes, which can be a tax audit trigger.
Filing for an extension. Again, expert opinion says filing for an extension may reduce your audit chances. The possibly apocryphal explanation advanced by FileLater is that IRS examiners have a quota and that returns arriving later in the season may come in after revenuers have filled most of their quota and are slacking off, playing some trashcan basketball, staring out the window, and updating their Facebook pages on their government laptops. Not impossible.
Amended returns. This may be the most unfortunate trigger myth, because it could convince someone due a refund not to claim it for fear of baiting the audit ogres. Go ahead and claim it, says TaxGuru, as long as you can back it up. The amended return won't by itself increase your chances of audit.
As long as we pay taxes, we'll have myths about them, including some really weird ones. Like the one about how using the peel-off label the IRS sends you to address your mailed-in return will trigger an audit. I'd never heard that one. But this guy says it's not so.
Now if you'll excuse me, I have to get back to my taxes. I'm preparing my own return again, this time using tax prep software, and this time I'm getting it right. Come to think of it, that may be the biggest myth of all.
Mark Henricks has reported on business, technology and other topics for The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications long enough to lay somewhat legitimate claim to being The Article Authority. Follow him on Twitter @bizmyths.
Image courtesy of Flickr user mijori, CC2.0