IRS Tax Audit Myths

A few weeks ago a handful of employees from Roni Lynn Deutch, A Professional Tax Corporation and Roni Deutch Tax Center® got together to put together a series of educational videos. The first episode was published over the weekend, and I wanted to make sure and share it with all of you. Check out the embedded video below, where James discusses common IRS audit myths. Also, be sure to stop by my YouTube channel to subscribe to my video feed!

Questions for the Tax Lady: August 23rd, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: I recently filed late returns for years 2000-2008. All income was from traditional employment. All but 3 years show a return, and total owed for the 3 years is about 8K. I fully expected to be fined/penalized/interest assessed, etc. for those owed taxes. However, the last 3 years (06,07,08) should have given me a refund of over 60K. I got notices from the IRS that ALL of the money was applied to money owed from the tax years 2002 and 2004. It seems like I should be getting some type of refund, what should I do?

First of all, I would suggest getting a full review of your tax account with the IRS to determine exactly what money is owed, and from which years. My law firm offers a Tax Account Review service, as do other tax resolution companies. You could even call the IRS and work to get the information yourself, but IRS representatives can frequently be difficult to work with.

Since your refunds should have come from the past three years, then you are not entirely out of luck. Unfortunately, the IRS will only hold a taxpayers refund for three years, but they can come after you for taxes owed from over ten years ago. Once you get the information from your tax review, you should be able to request any refund you are owed. On the other hand, if you find out that you still do owe the IRS, then you can always negotiate for a settlement. Call 1-888-TAX-LADY to speak with one of my representatives who can help you determine the best solution to your tax problems.

Question #2: I'm an independent contractor. If I include extra expenses while filling my tax returns will I be more likely to get audited?

No, as long as all of the expenses you list are legitimate business expenses you will have nothing to worry about. According to the IRS, “a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”

Common IRS Tax Audit Myths

There are a lot of myths going around this tax season about IRS audits, fortunately the RDTC Tax Help Blog has posted an entry debunking 10 of the most common myths. Below are the first 5 items in the list, but you can view the full article at Top 10 IRS Tax Audit Myths.

1. Having a home office is an audit red flag.

This myth was more popular when fewer people had home offices, but is definitely not true these days. Home offices are quite common today, and it alone will no longer flag you for an audit. However, that does not mean the IRS turns a blind eye to home office deductions. They will review it to make sure that it makes sense. If there is any reason for the IRS to believe that you are improperly claiming the home office deduction, then look out.

2. The mailing documents the IRS sends you are coded with audit flags.

This is false. The IRS sends you those mailing documents to make the mailing process more secure and easier. Failing to send your return in their provided envelope will probably do nothing more than delay your return and cause you frustration.

3. You can avoid being audited by filing late, after "audit season".

You would be surprised by how many people swear this works for them every time. Sure it works, but only because you start off with the odds against you being audited. Filing late or early will not help or prevent you from being audited. The IRS can audit you three years after the tax return in question is received.

4. If you make under a certain amount then you cannot be audited.

Income levels also have no affect on your audit probability. The IRS not only sends random audits to all income levels, but they take the time to look at each and every return. No matter what you make, if they believe that you are evading taxes in any way, they will audit you.

5. You cannot be audited once you have received your refund.

Receiving your refund just means the IRS has reviewed your tax return and agreed with your calculations. However, if they receive a return from a separate party who names you and that information does not match your return, then you can still be audited. And remember, the IRS can audit a return up to 3 years after it is received.

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