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Anatomy of an Audit

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The editors at Best Online Accounting Degrees decided to research the topic of:

The Anatomy of an Audit

The federal income tax was instituted in July of 1861 to help the government fight the Civil War. After patriotically paying our taxes we may dread the possibility of being audited. Do not fear! In actuality the odds are pretty slim.

How many Audits are preformed per Calendar Year (CY)?

- 2009:
- 138, 949,670: Total returns filed
- 1,425,888: Total audits conducted
- 1.03: Percentage of audits

- 2010:
- 142, 823, 105: Total returns filed
- 1,581,394: Total audits conducted
- 1.11: Percentage of audits

- 2011:
- 140,837,499: Total returns filed
- 1,564,690: Total audits conducted
- 1.11: Percentage of audits

Audit Rates by Tax Filing FY 2010

- Audit Probability: Individuals - Number of Audits
- 8.4%: Individuals earning over $1 million - 32,494
- 2.7%: Individuals earning $200,000 - $1 million - 120,481
- 1.1%: All individuals - 1,581,394
- 1%: Individuals earning under $200,000 - 1,428,419

- Audit Probability - Corporations - Number of Audits
- 14.2%: Corporations with assets over $10 million - 10,207
- 0.9%: Corporations with assets under $10 million - 19,127
- 0.6%: All businesses - 58,067
- 0.4%: S corporations and partnerships - 28,733

How Much Money is Recovered Through Auditing?

- $28.6 billion: money recovered by the IRS through audits of Corporation with assets over $250 million
- $1.8 billion: money recovered by the IRS through audits of all other companies

Money Recovered Per Hour Spent Auditing

- Large Companies (assets over $250 million) = $9,354
- Small/Midsized Companies = $1,025

Types of Audits

- 78: percentage of those audited in 2010 via mail correspondence
- 22: percentage of those audited in 2010 via in-person exam
- The Mail Audit: Letter from the IRS requesting an explanation or additional information and backup documents
- Taxpayers may think they are being audited when they are receiving an "Automatic Adjustment Notice"
- Interview Audits (Examinations): Very rare occasions the taxpayer may be required to appear at an IRS office with receipts and backup documentation to support their tax report.
- The Field Audit: An IRS agent comes to the taxpayers home or business - this is the usual form for small businesses or business operated from home.
- The Correspondence Audit: Usually requires the taxpayer to provide information supporting a specific claim made on your tax report, or a check for unpaid taxes.

9 signs you are about to get audited

- 1. You made a lot less money last year.
- 2. You lose or forget to file a form.
- 3. You work for yourself.
- 4. You claim losses from a hobby. (It's illegal to pretend a hobby is a business and then write off the related expenses. A business "must be entered into and conducted with the reasonable expectation of making a profit.")
- 5. Deducing home office (or car) expenses. This is commonly done incorrectly. Merely checking email from home after work, for example, does not justify a home office deduction; the home office must be used for work only.
- 6. You included expensive meals and entertainment costs among your deductions.
- 7. You were particularly generous this year. The IRS looks for those who inflate their charitable donations. A closer look is taken at those taxpayers who say they donated $500 or just under, since anyone who donates more than that amount must file form 8283.
- 8. You maintain an overseas bank account.
- 9. Your numbers don't match.

Popular Arguments To Avoid Paying Taxes

IRS publishes The Truth About Frivolous Tax Arguments Report, which outlines the most popular arguments people have presented to avoid paying their taxes and the tax court policy decisions used to debunk them.

In 2006, Congress increased the penalty for frivolous tax returns from $500 to $5,000.

Contention: Taxpayers can refuse to pay income taxes on religious or moral grounds - citing the First Amendment.

- The Supreme Court has frequently asserted that saying your religious beliefs are in conflict with the payment of taxes provides no basis for refusing to pay.

Contention: Paying taxes violates the Fifth Amendment

- The Fifth Amendment to the Constitution says a person shall not be "deprived of life, liberty, or property, without due process of law."
- Legally it is well within the government's rights to charge residents to live here.
- Supreme court maintains that the Fifth Amendment is not a limitation upon the taxing power conferred upon Congress by the Constitution.

Contention: Taxes are a form of servitude in violation of the 13th Amendment

- Courts have consistently found that paying taxes is not considered forced servitude
- Supreme court calls the claim "clearly unsubstantial and without merit," as well as "far-fetched and frivolous."

How long do I have to keep my paperwork?

- Keep the paper copy of your federal tax returns (Form 1040 or 1040A, plus all attached Schedules and Forms) forever. This provides a permanent record of your financial history.
- Keep all other records (receipts and back-up documentation, state tax return for a full four years since the IRS and most state tax agencies have three years from the due date or the filing date to audit or revise that return.
- 45: percentage of U.S. households that will not owe any income taxes in the tax year 2010 - or 69 million people and some will even get money back.

Most of the no-tax households paid other taxes, such as state and local income taxes, along with property and sales taxes, as well as FICA payroll taxes for Social Security and Medicare on the federal level.

Fun Facts about Taxes

- The U.S. tax code, which includes all of the rules, regulations and various legal jargon that make up tax laws, is almost 4 million words long.
- In the 1900s it took the average American three weeks to make enough money to pay their state and federal taxes. Today it takes at least until April - four months.
- U.S. citizens first began paying taxes at the end of the 18th century, but only on land and property. The personal income tax was the result of the government needing to raise money during the Civil War in July of 1861.
- Over 20% of hard copy tax returns contain errors, electronic returns have less than 1%.
- The IRS has more people working for it than the FBI

More Tax Facts

- The word "tax" is from the Latin taxo, meaning "I estimate".
- If someone reports their company for tax evasion in the U.S., he or she will receive 30% of the amount collected.
- The federal tax code was 400 pages in 1913. In 2010 it was 70,000 pages.
- In Texas, cowboy boots are exempt from sales tax. Hiking books are not.