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Auditing taxpayers is a "dying tradition."

My Taxes Are a Little, uh, Creative. What’s My Risk of Being Audited?

Enough time has probably passed for me to admit to playing fast and loose with the truth in some very old tax returns. But let’s drape this whole conversation in a veil of hypotheticality to preserve our modesty.

THIS ARTICLE DEALS IN HYPOTHETICALS, I SAY!

MY FAN FICTION NOVEL HAS NOTHING TO DO WITH ONE DIRECTION, I SAY! NOTHING!

As all liars will tell you when caught, I (hypothetically) had great reasons for lying. I was (hypothetically) a new graduate during the worst part of the Great Recession, cobbling together freelance jobs to afford a gruel made of boxed mac and cheese thinned with water and Goya packets. I was (hypothetically) hanging onto adult independence by my fingernails. And my fingernails were notoriously hypothetically thin and weak from my high-sodium gruel diet!

This was pretty much how my first tax return after college went…

KITTY:
I made $18,000 last year.

IRS:
Awesome, give us $3,000 of it.

KITTY:
That can’t be right.

IRS:
It is.

KITTY:
Wh— Bu— I live in one of the most expensive cities in America. I can barely pay rent and put food in my cupboards. The unemployment rate for young people is almost 20%, for fuck’s sake! Surely you wouldn’t charge a flat tax rate on someone so desperate?

IRS:
We totally would.

KITTY:
Teach me, dear creature, how to think and speak.
Lay open to my earthly gross conceit,
smothered in errors, feeble, shallow, weak,
the folded meaning of your words’ deceit.
Against my soul’s pure truth why labour you
to make it wander in an unknown field?
Are you a god? Would you create me now?
Transform me, then, and to your power I’ll yield.
But if I am that I am, then well I know
I do not have three thousand dollars, bro,
Nor to your purse no homage do I owe.

IRS:
Ma’am, will that be check or money order?

I’m not ashamed to admit that in this <big air quotes> “hypothetical” “situation,” I used every trick in the book to bring that number down. I failed to report under-the-table income, deducted every absurd thing I could think of, greatly exaggerated the size of usage of my home office, and obfuscated shared expenses.

But now I tell the truth to shame the devil! (The IRS is the devil, if that was not clear.) Stretching the truth was my only realistic option. I had no budgets left to cut, no small joys to sacrifice. It was lying, or not eating.

Thankfully, in this very hypothetical hypothetical, I was never audited. As my income rose to normal-person levels, I felt incredibly relieved to be able to tell the truth and pay what I owed. I have no patience for middle and upper class people who cheat on their taxes out of greed, or an indignant rage that they be expected to pay for the public goods they utilize on a daily basis. But I have a whole lot of sympathy for desperately poor people whose only “legitimate” avenue involves enough penalties, loans, and fees that lock them even further into poverty.

What is an audit?

Per the IRS

An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.

Basically, imagine your teacher asked you to self-grade your own papers. Then she looked you dead in your eyes and said “now I”m gonna grade your self-grading.”

You’ve probably heard audits spoken about with a fear generally reserved for Dementors. There’s good reason for that. If you’ve lied on your taxes, you will be caught. And the IRS is implacable. Expect no milk of human kindness when you explain that you can’t afford their new bill, with added penalties and charges.

If you haven’t lied (or made perfectly innocent mistakes), you’ll still have to go through a lot of bureaucratic hassle and heartache. You’ll probably have to pay out of pocket for accountants and/or attorneys to help you represent yourself. But that’s a rare situation, considering 90% of all audits result in a change. And the average change is $7,000 in the IRS’s favor.

Trust and believe, child: You don’t want to be audited.

The silver lining

Now that I’ve raised your heart rate, allow me to lower it again.

You will almost certainly never be audited.

Approximately 245,000,000 people file income taxes in America every year. In 2017, the IRS audited about 0.5% of them. That’s the lowest number in 15 years.

The IRS has never audited much more than 1% of households. But even that small number has plummeted in recent years. The Republican Congress slashed the IRS’s operating budget by nearly one billion dollars. Their total number of auditors and tax professionals plummeted. As CBS News put it: auditing taxpayers is a dying tradition.

Increasingly, the IRS relies on automated tools over human auditors. And that changes the way they scrutinize taxes.

Is there meat on your bones?

Auditing poor people is like fishing for anchovies.

Sure, people who make $50,000 or less have errors on their taxes. Auditing them might result in a few hundred bucks back to the IRS. But is it worth the time and attention of the IRS’s shrinking staff to wring a few hundred here, a few hundred here? It’s a much wiser use of their resources to go after a CEO who makes $50,000,000 a year. One significant omission could equate to hundreds of thousands or more.

Taxpayers with a $60,000 adjusted gross income (AGI), for example, have just a 0.47% chance of being audited. On the other hand, a household with AGI of $7 million has a 19.4% chance.

The Motley Fool

They have a great table that shows adjusted gross income versus audit risk, if you want to check where you land.

Are there sprinkles on your face?

Very low income people are more likely to be audited—but that’s generally only true if there are extremely obvious inconsistencies in your return.

Take this example:

“No, there are no sprinkles on my face,” proclaims little John, whose face is absolutely shellacked in sprinkles.

Some businesses do operate at a loss, especially in their first few years. But if you jigger your deductions until you have almost no income, take a big step back. Would you believe that someone with $0 in taxable income also reported $13,500 in charitable donations, $66,000 in business expenses, and a fully funded traditional IRA?

Don’t hand the IRS a return covered in sprinkles and claim you ate no sprinkles.

Did you fail to check your math?

90% of people will file their taxes electronically this year. Most have assistance from tax preparation software like TurboTax to do so. Every tax prep software I’ve ever used has checked for math errors automatically.

Obvious math errors are the easiest mistake for the IRS to catch. So if you’re someone who still files on paper, double check your numbers. Then triple check your numbers. Then ask someone else to quadruple-check your numbers for you.

Also, always be exact in your math. Don’t round numbers. If you list your income as $50,000, and list deductions of $100, $500, $250, and $3,000… Well. That’s hinky.

By the way, if you picture the Bitches as characters from The Fugitivewhich you should—I am definitely the United States Deputy Marshall Samuel Gerard to Piggy’s Doctor Richard Kimble. And it’s tiiiimmme to stop rrrrrunnning!

Did you “forget” one of you W2s or 1099s?

If you got a 1099 in the mail for a little side work, the IRS isn’t waiting for you to send it to them. They already have a copy. So don’t leave it off your taxes. They will absolutely notice.

(If you didn’t get a 1099 in the mail for a little side work, well, who’s to say what really happened on that fateful day…)

Oh by the way: THIS IS EXACTLY HOW PIGGY GOT AUDITED THAT ONE TIME SHE GOT AUDITED.

What? You didn’t know Piggy got audited? Me neither! It’s her darkest secret! We’ve been friends for fourteen years and I didn’t know until I sat down to write this and she confessed! THOSE FOURTEEN YEARS WERE A LIE.

Piggy was writing for a website at the time as an independent contractor on top of her day job. They sent her a 1099. She was too lazy to find it when she sat down to do her taxes so she left it off the forms. A full year later, when the bitch thought she got away free and clear, the IRS sent her a bill for $1,000.

It’s like I don’t even know her.

Did you get greedy?

You may have heard that certain deductions—like a home office, or very high charitable deductions—are automatic flags. This isn’t strictly true. It’s more accurate to say extreme outliers get you noticed.

Claiming 100% of a home office that you also use as a spare bedroom when guests are visiting—whatever. That’s between you and your god.

But buying a gigantic flat-screen and a new sound system for your “home office” and swearing up and down that it is only used for business purposes is uhhhhhhh EXTREME SUSPISHISH BORK BORK.

Even when I was making $18,000, I refused to fib my way down to zero. I searched my soul and decided I had thoroughly enjoyed my use of police, sidewalks, and food inspectors. I paid a few hundred, even though it really hurt. It made me (a) feel like a legitimate participant in society, and (b) statistically less likely to be audited.

I won’t tell you not to stretch the truth to justifiable limits if you have to in order to survive. The IRS expects you to make a strong but truthful case to pay the least amount you have to. Don’t get greedy.

Don’t stress

The IRS has a limited amount of time to audit you. It’s sorta three years, sorta six years, and (only in very rare, very egregious cases of fraud) sorta forever

But in actual practice, if the IRS wants to audit you, they’ll do it the same year you file. They don’t have the resources to peer into their magick scrying pool and ask Atropos, Clotho, and Lachesis to cool their jets for one fucking sec so they can check if Kelsey reported her bartending tips in 2014.

If you’re someone who makes fine money, but think your love of Ayn Rand sets you above filing taxes honestly, please go ahead and live with a cold shadow cast over your heart on even the warmest and sunniest April day.

But if you’re someone who absolutely cannot pay taxes and eat dinner tonight, and you said no to the five above questions, take heart. You are not the droids they are looking for. Siphon any anxieties you have about auditing into trying to grow your income so that poverty can’t make a liar of you next year. The latter is far more productive.

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10 thoughts to “My Taxes Are a Little, uh, Creative. What’s My Risk of Being Audited?”

  1. In 2014, I was audited for my 2012 taxes. Even though I knew I hadn’t done anything wrong (at least not intentionally), it was a stressful experience. It took time. It cost money. I was worried the whole time that maybe I’d fucked up in ways that I hadn’t intended.

    Ultimately, the result came back “no change”. (I didn’t realize until reading this article that only 10% of audits come back “no change”.) The auditor said, “J.D., you cheated us out of a bit of money over here. But you were stupid and cost yourself money over here.” Basically, I was making mistakes both for and against me. In the end, these mistakes balanced out.

    Since then, I’ve tried to be much better about documenting things the way the IRS wants. So, for instance, when I’m buying drinks for Piggy and Kitty at Fincon, I make sure to note the purpose of the drinks (“expanding business network”). I don’t want to get audited again. But if I do get audited, I hope I’m better prepared.

    1. That’s like the best possible result to an audit. But still unnecessarily stressful and awkward. NO BUENO.
      Also please adjust your categorization of buying drinks with us to “kingmaking and trendsetting for fame and glory.” K thnx.

  2. I completely support less stress about money and paperwork. However, some recent news articles show that if you claim the Earned Income Tax Credit (EITC), AKA you don’t make a lot of money, you have a higher chance of being audited.

    https://www.vox.com/future-perfect/2019/4/3/18292741/irs-tax-audit-eitc-black-belt
    https://www.propublica.org/article/earned-income-tax-credit-irs-audit-working-poor

    If you don’t claim the EITC, you should be safe!

  3. My BFF was audited about her deductions for the movie column she wrote for a local newspaper. And she lost. And then she appealed.

    Awesome result: Not only did the second IRS person agree with my friend that these were legitimate deductions, she started suggesting additional ones! “Do you buy books on film for research? Have a VCR so that you can screen films?” and so on.

    The audit was stressful as hell — as J.D. notes above, you do *not* want this experience in your life. She stuck to her guns, and she not only won the war, she got to annex a little bit of territory.

    Again: “Tax audit” is not on my bucket list. My luck, I’d be one of the 0.05 percent* who gets pulled in. But if it happens, I will have a panic attack, cry a bunch, eat some sweets and get on with the audit. The fact that my tax preparer is an enrolled agent and would go with me helps me feel better about things.

    *I would absolutely put this on a T-shirt: “I’m a member of the 0.05 percent! Wanna see my audit?”

  4. I got audited last year and will likely get audited this year, too- likely for the same reason. And that reason’s 100% because I get 1099’s from amazon for books I published, and I don’t report them.

    Turbo Tax, for some reason, has never let me enter a single 1099 unless I have all this stuff for Self Employment… Which I definitely don’t have, because I never knew it was necessary; I was 21 at the time, and self publishing had just become a thing- and Amazon’s absolutely shit at being like “hey before you self publish you might want to do x y and z to make sure you can appropriately report the forms we give you for your taxes”… But now I just don’t see the point of retroactively paying money I don’t have in order to get it, because the books aren’t being sold anymore (and haven’t been for a while), and I’m no longer getting income from them.

    I can’t afford to go somewhere to get my taxes prepared professionally, because all the ones here want you to pay up front… So I just leave them off my taxes when I file them, fully knowing that I will get audited for failing to report that money, and when we get our tax returns back I just set aside the money I’ll probably wind up getting charged when I get audited.

    I’m shameless, I tell you XD

    1. Just a heads up, if you make 55k or less, you are entitled to FREE tax prep help through the VITA program. It won’t be as in-depth as a CPA, since VITA workers aren’t required to be certified (though they do go through training), but it’s something!

  5. Love this post.

    I assume based on the excellent reporting from Pro Publica that as long as I’m not one of the working poor trying to rightly claim the EITC, then the IRS won’t bother me. 😉

  6. As the “don’t get greedy” section points out it seems good to act in a way that your conscience is sound. For me this means doing a thorough and non-sloppy job on taxes. They still suck to do and I rue our overcomplicated tax code but following it is kind of necessary. Is underpaying $5K any different than stealing $5K from a federal bank?
    After all, I could make lots of money selling drugs, porn, and loan sharking but I wouldn’t really be able to feel like a good example for my kids. How the money is made or saved seems to matter. It’s funny how some things are ok but the same thing not ok depending on context in our culture. Like if I pocketed a croissant from a buffet it would be kind of fine by most. However, if I stole a croissant off the table at a farmers market while the baker wasn’t looking that would be a total dick move right? Anyway, awesome post it has me thinking…

  7. Was there some sort of scholarship or some other such circumstance where there was income that didn’t come to you as cash that caused the $3k tax owed on $18k of income? I’m confused/scared on that part so would greatly appreciate any further info there.

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