Most taxpayers get an image of a medieval torturer cracking a whip on some poor, innocent person in their heads when they think about the IRS or taxes in general.
Hating the IRS may be as American as apple pie as is trying to legally lessen one’s tax burden. But as the April 18 tax deadline approaches, many Americans forget one important fact about America’s most hated government department: It’s not stupid. There are certain types of common errors that the IRS is especially good at noticing.
For instance, the IRS is especially good at noticing disparities, such as someone who for years claims minimal amounts of charitable contributions looking for a $100,000 deduction. That also goes for other common deductions such as medical expenses. Forgetting to attach paperwork such as W-2 forms will catch the attention of the IRS as will making mathematical errors in your return. Moreover, taxpayers often think that they don’t have to pay the money that they owe if they file an extension when in fact they are only getting more time to file their paperwork. Failing to pay can result in significant penalties and interest payments. Unfortunately, figuring out what triggers the IRS’ attention is a crap shoot at best.
“The IRS does not disclose the criteria it uses for audits,” says Bob Meighan, vice president at TurboTax, in an interview, adding that the government is far more likely to audit wealthier taxpayers than those of more modest means. “ They are focusing their attention more on returns where they have the potential to generate a lot of revenue.”
Some critics, though, have claimed that the IRS’s efforts to crack down on wealthy tax cheats have gotten off to a slow start. Data found by the Transactional Records Access Clearinghouse at Syracuse University found that the IRS’ Global High Wealth Industry Group (GHWIG) had only audited 13 returns over the past year and a half as of last month.
“Because a single taxpayer at this level frequently will file different kinds of returns, the number of individuals who so far have been targeted is almost certainly very small,” TRAC says.
A surprisingly high number of returns have errors. A Treasury Department found up to a 61 percent error rate on tax returns prepared by unlicensed professional tax preparers. People who find errors in previous returns are required to file amended returns. If they don’t, and the IRS catches them, they could face interest and penalties.
Among the tips the IRS is offering taxpayers is to file electronically and to make sure that taxpayers enter their social security numbers correctly. Anyone looking for help beyond that may be out of luck. For years, the IRS has ratcheted up spending on enforcement at the expense of helping taxpayers.
There have been government reports issued for years about how taxpayer assistance programs are not adequately staffed and often provide the public with wrong information. Last-minute filers should probably not bother trying to get ahold of the IRS so close top the tax deadline. There is plenty of information, however, on the agency’s website.
Many taxpayers may not realize that copies of forms such as W-2s and brokerage statements are also provided to the IRS. This enables the agency to match the data on a return to the information they have on file about a particular taxpayer. Meighan calls the matching system “probably their number one defense against fraud and cheating.”
Other areas where the IRS watches especially closely are charitable contributions. Melissa Labont, technical manager at the American Institute of Certified Public Accountants, says that taxpayers need have proof of the value of the items that they donate with “very detailed records.”
The U.S. tax code is enormously convoluted. That’s one of the few areas where Democrats and Republicans agree. It’s a good thing that most Americans only need to wrestle with it once a year.