Simple Mistakes Trigger Audits

March 12, 2007
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GRAND RAPIDS — Mistakes as simple as leaving out a number or issues as complex as giving more than one earned to charity can trigger an audit from the Internal Revenue Service.

Daniel Fuller, tax director at BDO Seidman, said there are ways to limit the risk of being audited. One way is to use the services of a professional tax preparation service or the free Volunteer Income Tax Assistance program sometimes offered at local universities and colleges.

Those who make more than $100,000 a year have a higher chance of being audited, Fuller said.

“The service is really starting to move to getting the audits in line with where the dollars are,” he said. “If you’re in a higher income, you have a greater chance.”

In 2006, there were 258,000 audits conducted on those who made more than $100,000, up 18 percent over 2005; 17,015 of those audits were done on those who earned more than $1 million, up 33 percent from 2005, when only 12,835 such audits were done.

Audits can be done by mail or in person, Fuller said. Mail audits usually deal with issues such as missed letters or numbers on tax forms, or perhaps an inconsistency in a Social Security number because of a name change.

“If there’s a little more dollars or meat to the issue, then they will come out and do an actual audit,” he said.

Mail audits can usually be rectified with paperwork and proper documentation, Fuller said, but a personal audit could look closely at home offices, records and books.

“An audit is not always bad,” he said. “These issues can happen naturally.”

Fuller said situations such as making large charitable contributions during the same year a business owner takes a financial loss is a naturally occurring instance that might spark an audit. In these situations, people can usually clear up discrepancies with the IRS by showing receipts and proper documentation.

“Prepare up front to mitigate those things,” he said. “Make sure that you have the documentation; then it will go away.”

Other issues that may make the IRS take a second look are suspiciously low income, rounded numbers and home office deductions. The IRS also is concerned when charitable giving is especially high or if mortgage deductions exceed income.

“A lot of times, it’s the mismatch of income that you’re making to deductions you’re trying to claim on that return,” he said.

Fuller said if a person is found to owe taxes during an audit, he or she is usually just made to pay that amount with interest, but it depends on the agent handling the case.

“They do have, then — depending on whether they think that you were egregious, or evidence that was obvious — they do have the ability to charge penalties,” he said.    

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