Thursday, March 13, 2008

IRS Audit

First, a little history lesson. In 1998, the IRS Reform and Restructuring Act was passed, ordering the IRS to focus more on taxpayer rights instead of collection activities. As a result, about one of every 79 tax returns were audited that year. This dramatic decrease continued, and by 2003, according to IRS data, only one of every 150 individual taxpayers were audited.

I am afraid this positive trend did not continue though. The IRS soon returned to their wicked ways and by 2005, the number of audits hit it’s highest since 1998. The 2006 tax year saw 1.28 million individuals audited.

One big reason this happened is because taxpayers, mainly those that skew their numbers purposely, became too bold. More and more tax errors were being made and the IRS decided to step up collections again. So the same lawmakers who once demanded the IRS give taxpayers the benefit of the doubt began applauding the new aggressive approach. Members of Congress are hoping that enhanced enforcement efforts will help close the $345 billion tax gap. According to 2001 figures, that amount represents the difference between what taxpayers should have paid and what they actually paid. So, without some help from additional IRS collections, Congress would have to consider raising taxes.

But don't let fear of a potential audit discourage you from filing for credits or taking legitimate deductions. Even though some actions taken on your tax return are likely to raise a red flag, that doesn't necessarily mean you'll be audited. Even if your return is questioned, it's not absolute that you'll end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, you’ll have nothing to worry about.

In the end, doing your homework and backing this work up will pay off in a tax examination. Be confident in what you entered. Trust me, you’ll find this is easy if you keep good records to support your tax return entries.


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