How-to-Avoid-an-IRS-Audit-3A couple of months ago my husband and I received a letter that nobody wants to receive, a letter from the IRS. Everyone knows that if the IRS sends you a letter in the middle of the year, it is probably not going to be good news.irsAfter a few minutes (or seconds) I finally opened the large envelope to see what the IRS had in store for us.

We had been randomly selected for a compliance research examination (audit). The good news was that they could find mistakes in our favor, the bad news was that this “random prize” was not something we could say “no thank you” to. Dave and I both felt the IRS must think we made some type of mistake.IMG_9875-2I followed the instructions and called our assigned agent to make an appointment to meet. She restated that we weren’t be accused of anything, this was a research audit, and three things could happen:

  • We could owe money.
  • We could receive money in return.
  • Our return would stay the same.IMG_9876-2Dave and I both joked about being audited, but also had other emotions. We were aggravated because we knew it was going to take time to put together our documents from 2014 (the year we were being audited for). Ironically 2014 was the only year we hired a professional CPA compared to all other years where we have used Turbo Tax.

We also both agreed that we had ZERO worries because we pay all taxes legally required. For that reason, we looked ahead to the audit with a sense of “Ok, we know we will be fine, and this will be interesting”. We were curious about what an IRS audit looked like.

IMG_9878-2When I mentioned to my friends that we were being audited, they all had the same “OH MY GOODNESS” face. You could see people wondering “why” we were audited, and then praying they would never be contacted by the IRS. 

The day of the audit (Dave had to take off of work) we dropped the girls off at Christa’s house and then drove for about an hour and a half in rush hour traffic.  Once we arrived in the building, it was very obvious where we needed to go.IMG_9867

There was a huge line of people waiting outside of the IRS door (it reminded me of the Social Security line). We waited in line for about 10 minutes (we were early for our appointment). I overhead a few people talking about why they were in line (needed to make a quarterly tax payment, needed to talk with an agent, etc). Right at 8:30 someone came to the front of the line and asked for everyone who was there for an audit. Out of about 30 or 40 people in line, 5 of us came forward (2 couples, 1 lady). It was kind of embarrassing because as we did our walk of shame past all of the other “law abiding tax payers” we got that look of, “oh….look at those tax cheats”.

IMG_9877-2Each person (couple) was ushered to meet with their assigned IRS agent. Our lady was very nice and started immediately. She went over our rights and then we started the process. She asked us a ton of questions (do you receive child support, do you have offshore bank accounts, do your kids live with you, are your kids “child stars”?). We then started going over specifics in our tax return that they wanted to verify.

whyOne of the reasons we were randomly selected is because we file a tax return that is simple, but has a few extra scenarios. The ones you want to be most worried about (this does not apply to us) are people who claim business expenses (mileage, dinners, rent, etc) on their taxes. We have a rental property and sold some stock, so that elevated our chances slightly.

It took about 2 hours to go over the return (it was painless because everything was correct and we had the proof). She told us to wait a few minutes while she printed out a document saying that everything was checked out and everything was staying the same (we did our taxes correctly!!!). She will then forward the information to her boss and boss’s boss for approval.

Here is what I learned from our interesting experience:

  • You should never lie to to IRS (the other audited tax payers did not appear to be going through a research audit and looked upset when I saw them).
  • The chances of you being audited are 1.1%.
  • You can do things that increase the chances of being audited (when your numbers don’t make sense…i.e. you have 5 children and claim $10,000 of revenue a year).
  • The IRS is so understaffed.  In an economic slump, lots of bright CPA’s who get laid off from the private sector go work for the IRS. Once the economy picks up, these people leave because the benefits are not nearly as lucrative. The Houston office has offices for 9 auditors and only 5 are being used.
  • Save your records if you are going to claim things on your tax return. I am so lucky Dave is organized and has saved (and put into spreadsheets) all of our financial information.
  • If you have made a mistake, you won’t be thrown in jail (unless it is for a large sum of money and they can prove you knew better). Instead, they will work out a payment plan and try and get back the money as quickly as possible.
  • It is better to stay friendly throughout the audit because if you have 99% of your paperwork, they will take an oral acceptance of your statement instead of making you go back and find the documents, print the documents, and send them in.
  • The research audit is an IRS agent’s least favorite audit because most of the time the return stays the same. They prefer audits where they are collecting money from people who did not pay their fair share.
  • Taxes will never be fair, but they are inevitable. No matter what type of tax system we have (flat tax, progressive, etc) we will need the IRS to make sure everyone abides by the rules.
  • I do not want to receive another audit letter in the mail!

So there you have it, our interesting 3 hour date. I call it a date because Dave and I were happy to spend some alone time together (driving to and from our appointment).

My question for you, do you think most people are honest when it comes to taxes?

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