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Filing late can cut your audit risk By extending your filing date four months or more, the IRS audit pool may be full of returns by the time yours arrives If the IRS has ever audited your tax return, you’ll probably leave no stone unturned in finding ways to avoid a repeat of that experience. You might file a very conservative return, ignoring some legitimate deductions that might draw unwanted attention. Unfortunately, such caution may not ward off the IRS, and the only result will be a higher tax bill. You might also shy away from some of the more effective tax shelters — even those approved by the IRS — and hope that your return passes quietly under Uncle Sam’s radar. Or you could use what may be the most effective strategy of all, one that pertains not to how you file your return, but when. Common sense suggests that filing on or before April 15 is the smart play. After all, shortly after that date the IRS service centers are deluged with returns, and you might expect your return to get lost in the shuffle. In this instance, though, common sense may lead you astray, since filing on time may actually increase your chances of being audited. We have found that most audit-worthy returns are selected during the summer months from the group that filed on or before April 15. But if you ask for the automatic four-month extension and then get an additional two months (which is almost always allowed), you can legally file as late as October 15. By then, the IRS has probably already reached its yearly quota for audited returns. Thus, filing as late as the law allows can be one of the shrewdest tax moves you can make. (Reminder: Extending the time to file does not extend your time to pay. Be sure to pay your tax bill when you file the first extension on April 15.) On average, the chances of your individual return being audited are about one in 100. But if you report a taxable income of more than $100,000, your audit potential quadruples. Other triggers. Your exposure can also be increased if your return has certain other characteristics. For example, nine out of ten audits are triggered by the ratio of your claimed deductions to your income level. In particular, the IRS takes a hard look at deductions claimed on Schedules A (itemized deductions), C (unincorporated businesses) and F (farm income). Deductions. If your Schedule A shows itemized deductions adding up to more than about 35% of your adjusted gross income (AGI), your chances of being audited increase. If your Schedule A total exceeds 44%, plan on a visit with an IRS agent. Unincorporated business. If your Schedule C deductions are less than 52% of your AGI, they probably won’t attract much attention. But if they reach 65%, watch out. Also, you should know that the audit rate among unincorporated business with earnings under $25,000 jumps to 4.4% — more than four times the overall average. If you file both Schedules A and C, you need to pay attention not only to each schedule’s percentage, but to their combined percentage as well. Even if each schedule seems to fall below the danger zone, if they combine for more than 105% of your AGI, you may be in trouble. Farming. If you file a Schedule F to report farm income and expenses, you don’t become especially vulnerable until your deductions reach 59% of your AGI; at 68%, you can bet the farm on being audited. Don’t sacrifice legitimate deductions. Fear of being audited should not deter you from claiming legitimate deductions that push your return into the danger zone. But it should motivate you to compile and keep documentation necessary to substantiate your deductions. If your return includes any deductions that are unusual in nature or size, attach to your return a written explanation. It won’t prevent the IRS computer from flagging your return, but it may persuade the IRS agent who makes the audit decision that your deduction doesn’t warrant further scrutiny. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |
