There is a rationale behind why only a small fraction of annual tax returns are subjected to auditing each year. It’s not that the Internal Revenue Service doesn’t want to collect the money that’s owing to it from taxpayers.
It’s because the agency has, for many years, been operating with a severely inadequate budget, which has severely hindered its capacity to carry out audits.
But if additional financing is provided, things might take a different turn. Even if this is fantastic news for the IRS, it might not be the kind of news that taxpayers are excited to hear.
However, should you begin to be anxious because the likelihood of you being audited is likely to increase? Certainly not in every case.
Certain taxpayers are being ignored by the Internal Revenue Service.
A funding package for the Internal Revenue Service (IRS) totalling close to $80 billion was recently approved by the Senate.
More than half of this funding is designated for enforcement purposes, which means that it will be used to ensure that taxpayers pay the appropriate amount of tax. The number of audits conducted by the IRS fell by 44% between 2015 and 2019. And the main reason for such is a deficiency in financial resources.
The IRS may now have the capacity to conduct more audits. However, this does not imply that
every single taxpayer needs to be concerned.
Historically speaking, filers earning a high income or a low income have been subjected to the greatest audit rates by the Internal Revenue Service.
People with earnings in the middle to the moderate range, and even fairly high earnings, typically have lower audit rates.
When the Internal Revenue Service (IRS) receives extra funding, there is a concern that taxpayers who are normally exempt from an audit could wind up being identified for one.
However, IRS Commissioner Charles Rettig is adamant that an increase in resources would not result in an increase in audit activity directed at middle-income Americans or small businesses. So that’s some encouraging news.
When it comes to audits, this certainly does not mean that people with middle-class incomes are absolutely free and clear of any responsibility.
Because most self-employed people can’t afford to spend half of their income on business expenses when their wages aren’t that high, to begin with, they’re more likely to face an audit if they claim a large number of business deductions. For example, a self-employed writer making $75,000 a year could face an audit if they claim $40,000 worth of business deductions.
In a similar vein, the tax return of a married couple that has a joint income of $60,000 may be subjected to more scrutiny if they claim $10,000 each year in mortgage interest deductions.
A mortgage deduction that is that big simply does not make sense at that income level. But on the whole, additional financing might not have that much of an effect on middle-income earners, just as middle-income workers have traditionally had a lower risk of having their tax returns inspected.
Filers can reduce their audit risk.
What is the most effective approach, regardless of financial level, to sidestep an audit? Be honest. Do not omit to disclose income, do not lie about business expenses that you did not actually incur, and do not makeup deductions that are not legitimate.
Even if a taxpayer files their taxes in a perfectly ethical manner and claims deductions that are within reason, there is still a possibility that they could be selected for an audit by the Internal Revenue Service (IRS).
However, taxpayers who keep solid records to support their claims can frequently emerge from those audit situations unscathed. This is one reason why it is so essential to always maintain solid tax records.
It takes the Internal Revenue Service (IRS) an average of three years to audit an older tax return, so taxpayers shouldn’t just discard all their tax paperwork once they have submitted their forms. Instead, it is recommended that every document be maintained safely for a minimum of three years.
The Internal Revenue Service can go back longer than six years if it identifies an error that is “serious,” but in practice, it does so only very infrequently.
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