Updated: Jun 10
I have some bad news for you.
The Biden administration is committed to increasing the IRS budget to $15 billion with a focus on technology and increased enforcement- that can’t be good for normal Americans. The government has approved trillions of dollars in stimulus, have committed to spend the cash needed to vaccinate 300 million Americans, along with a big blue state bail-out for the deficits that the COV lockdowns have caused! It's a big price tag and YOU and I will have to pay. Probably not going to be able to escape it either. Statistically, every dollar the government spends on auditing and tax enforcement returns $5 in tax revenue; probably the only government spending that “earns” a “profit”!
The good news is, I've got you covered.
I am probably one of the only CPAs that reads the IRS Data Book, which is a periodical published annually that shows audit statistics for every form and every line item on your 1040, as well as audit rates for every type of business structure. I have also practiced for nearly 20 years with a former group manager in the enforcement section at the IRS. His knowledge has provided me with deep insight into the IRS differential scoring system, which effectively allows me to assess on any individual tax return the amount of audit risk they face. In 45 minutes to an hour, I can tell you if you're going to get audited or not.
Key points to audit proofing your taxes?
Here are some key points when it comes to audit proofing.
Certain forms and line items have higher rates of an audit. For example, Schedule C and Schedule E are considered audit magnets. Schedule C is where sole proprietors list their income and business expenses from their small businesses. In some cases, this Schedule has as much as a 5% audit selection rate. However, if I move this business and restructure it as an S corporation, that audit rate drops down to three-tenths of a percent. Similarly, Schedule E, where investors report their rental income and expense, is also audited quite frequently. Moving this activity to a partnership tax return lowers your chances of selection by a factor of 10. We call this activity cleansing the Form 1040. We’ll remove or eliminate the reporting of high-risk activity on the personal tax return.
As I said before, audit proofing is going to become ever more important in the coming years. And the IRS has 3 years to go back, so it's possible that 2020 tax returns will not get selected for audit until as late as 2023.
Now is the time to plan. Take the opportunity to have a conversation, to have your tax return looked at, let us score for audit potential, and let us audit-proof your financial life.