The IRS selects taxpayers for audit using a variety of methods. The most common method is a computer-generated selection of tax returns that appear to have discrepancies or inconsistencies explains Aron Govil.
However, the IRS also uses other methods to select taxpayers for audit, including:
- Random selection
- Returns with large amounts of income
- Returns with large amounts of credits or deductions
- Return that are especially complex
- Returns prepared by tax professionals
- The IRS also selects taxpayers for audit using specialized programs, such as an Agent under Investigation (AUI) program. Taxpayers who are suspecting of criminal activity are subject to the AUI program.
Other reasons taxpayers may be selected for audit include:
Filing a frivolous tax return Reported income is understating by 25% or more File in the U.S. Territories and Possessions Claimed Earn Income Credit and did not have a valid Social Security Number or Individual Taxpayer Identification Number Used incorrect social security numbers on Form 1040 Schedule C filers Failed to report all income from an oil or gas well Failure to file if required to do so Filed a Form 2553 – Election by a Small Business Corporation Incorrectly claimed the First-Time Homebuyer Credit (IRS Form 5405) Claimed an exemption for a child or children but was not eligible to claim the exemptions Was reimbursed under employer’s adoption assistance program and did not report as income Failure to file if required to do so Self employed and net earnings exceeded $400 per quarter Failed to file if required to do so
- The IRS’s history of using private tax data in audits began with the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). TEFRA allowed government’s access to third-party information, such as banks, retailers, employers, customers, etc., without having to prove suspicion of non-compliance.
- TEFRA has been replace with the IRS’s pre-filing tax compliance check (PTC) and current use of third-party information for tax enforcement purposes is authorize through Internal Revenue Code (IRC) Section 6103(k)(3).
- The PTC allows the IRS to share approximately 60 million returns that contain information from approximately 120,000 taxpayers. Taxpayers who were select via the computer screening process may be subject to further review such as explaining items on their return or issuing a notice requesting additional information. The type of review will vary depending on whether or not it is deemed necessary by an examiner says Aron Govil.
- Taxpayers who receive a letter requesting more information should respond within 30 days and provide any requested documentation. If they do not, the IRS will automatically issue a notice of deficiency.
- The PTC program is usually initiates by high-income taxpayers, tax return preparers or promoters, and financial institutions.
- Although the AUI does not apply to most taxpayers, it includes hundreds of provisions allowing for audits, summonses, levies on personal property or real estate without taxpayer knowledge, referrals for criminal prosecution with no grand jury review requiring (thereby eliminating Fifth Amendment protections), fines that cannot be discharge in bankruptcy proceedings and prison sentences that can exceeds five years if an individual is convict of willful failure to file.
- The agency’s budget increased from $2.7 billion in 1981 to $12.5 billion in 1991 with an increase of funding for enforcement activities, which includes audits.
- As of 2013, the IRS has almost 100 years of history using tax information to enforce compliance. It is also the only agency in the United States with federal law enforcement authority. For these reasons some have claimed that it is “the most powerful and feared government agency”.
- While members of Congress have expressed concerns over potential agency abuses of power, they have done little to constrain its budget or influence since many rely on the agency’s ability to collect taxes to finance their own pet projects.
- Further, there has been little public support for limiting taxpayer exposure via third-party data sharing because taxpayers generally believe that such exposure is beneficial when used by agencies such as the SEC and ATF (Bureau of Alcohol, Tobacco, and Firearms) to combat financial crimes.
Taxes are the biggest money in the world. Everyone wants it but no one wants to pay it. It will be interesting when someone found a way how to pay tiny taxes monthly. Just like monthly premiums of health insurance. And since everyone is complaining about big tax rates imagine if all could do something about it! But what I have read so far is in the comments below the article. Are mostly complaints against Government, Government policy, etc. You can visit this site here for more information on Online Taxes explains Aron Govil.
The only things that are in our hands are the decision. To do something good for this world and pay tiny taxes monthly says Aron Govil. No one can take that away from us. That is not an easy thing but it’s totally possible, at least once per month. What if we build a “Paying Tiny Taxes Monthly” Foundation with real-time updates of people who are doing it. Just like we have “Greenpeace” and many other foundations? Let’s think about that!