Brace for the “Obamacare IRS” Audit Offensive

Independent Living Takes on Establishment Media’s Pooh-Pooh Complacency

Taxpayers beware! Now isn’t the time for complacency when it comes to tax planning. The IRS enters 2013 with a “mandate” to help the Obama Administration raise revenue. The dreaded agency is newly beefed up, ready to enforce a maze of new Obamacare taxes, and ready to slam millions of unlucky taxpayers with audits.

The tax code can trip you up in innumerable ways. A simple calculator mistake could trigger a full-blown audit. And an audit could result in taxes and penalties that you may not really even owe – notwithstanding a given IRS auditor’s interpretation of the tax code to the contrary.

The IRS operates on a “guilty until proven innocent” premise when dealing with taxpayers. The presumption of guilt is explicit and heavy-handed with regard to taxpayers who legally hold assets offshore.

But regardless of whether you’re a hedge fund titan with Swiss bank accounts who is automatically presumed to be using them to hide tax liabilities from Uncle Sam, or a waitress who is presumed to be underreporting cash tips received, being honest isn’t always sufficient to save you from the wrath of the IRS.

What, Me Worry?

Many Americans falsely believe that as long as they aren’t trying to cheat the system, the IRS won’t come down on them. This dangerous myth is even propagated by some popular, mainstream sources. We came across a Kiplinger article (November 30, 2012) that serves as a case in point.

Here’s the paragraph of interest from the article: “The IRS audits only slightly more than 1% of all individual tax returns annually. The agency doesn’t have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.”

The part about “pretty low” odds of being audited, while true on average, is not true for everyone. As Kiplinger acknowledges later in the article, “…the odds increase dramatically for higher-income filers. 2011 IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 3.93%, or one out of slightly more than every 25 returns. Report $1 million or more of income? There’s a one-in-eight chance your return will be audited.”

Hence, the IRS, far from being concerned merely with accuracy across the board, discriminates on the basis of income when selecting taxpayers for audits. It enforces the tax code selectively to try to boost the revenue generated from audits.

If you are selected for an audit, you may have reason to worry, even if you aren’t “fudging” on your taxes. Over the years, numerous General Accounting Office reports have documented an incredible 60-80% error rate in IRS calculations of taxes it alleges are owed by businesses and individuals.

Not even the IRS Commissioner knows the 73,000 page tax code inside and out, let alone how it applies in all circumstances. IRS agents count on taxpayers passively accepting their arbitrary findings and often resort to bluff and intimidation – the government’s own brand of “tax cheating.”

Dan Pilla, in his Taxpayers’ Ultimate Defense Manual (published by American Lantern Press) described one sneaky IRS tactic as follows: “For years, the IRS has used an obscure tool to collect money. The tool enables the IRS to administratively alter a tax return if it contains mathematical errors.

[In] turn, IRS bills the citizen for the deficiency that exists after correcting the error. However, the IRS strays far beyond the limits of the law, employing the mechanism to alter returns that are not incorrect. IRS collection statistics reveal that it uses this technique to collect millions in taxes, most of which are probably not owed.”

Just because the IRS sends you a “bill” does not mean you have to accept it! If you disagree with the IRS’s calculations, challenge them. Taking on the IRS alone can be daunting, but a tax attorney or enrolled agent can help you win an appeal or a challenge in tax court.

Audit Triggers to AVOID

It’s best to avoid an audit in the first place. They aren’t 100% avoidable, but you can reduce your odds of being selected for one. Legitimate deductions rarely trigger an audit. However, IRS computers and bureaucrats do look for “red flags” that suggest (rightly or wrongly) that a taxpayer may be “fudging.”

We’ve identified some of the most common red flags on tax returns:

  • Required forms are missing.
  • Forms are not completely filled out.
  • Forms are riddled with errors or omissions.
  • Reported income is less than that indicated by tax documents (W2 forms, 1090 forms, etc.).
  • All figures are “round” numbers (i.e., “$5,000” instead of “$4,997”), implying the filer is just guessing or outright making up the figures.
  • A waiter fails to report tips or reports them as an unusually small amount.
  • An income in excess of $200,000 is reported (this factor alone more than triples the likelihood of being subjected to an audit).
  • Tax-protest literature or anti-IRS comments are included with a return (anyone who goes this route is waving a red flag in front of a bull; if you want to express your displeasure to the IRS for all it has done to erode your freedom, do so in a separate mailing — better yet, do so anonymously).
  • Business losses (even legitimate ones) are claimed to offset other forms of income.
  • Itemized deductions appear to be arbitrary or phony.
  • Itemized deductions are unusually high given the filer’s reported income.

As you can surmise, the single biggest audit trigger is inaccuracy. So don’t try to alter or scale down your legitimate deductions just to make them appear more “normal.” If you can back up each of your deductions, go ahead and take them. On the other hand, if you don’t keep good records, your perfectly legitimate deductions could be disallowed after an audit.