No one wants an audit — not you and not the taxpayer. However, audit numbers are on the rise, and the shift is affecting the lower income audience in a significant and somewhat disturbing way. It has to do with an IRS concept of “real” and “unreal” audits, and no matter how skilled you are as a tax professional, many of the flags are computer-generated and beyond your control. However, you can offer your clients some support against this challenge. We’ll tell you where the shift stems from, what the statistical repercussions are, and how you and your clients can avoid getting dragged into the time-consuming ordeal of responding to an audit.
Since 2010, the IRS has experienced significant budget cuts and now has less than half of the staff in its enforcement group than they did in 2010. As a result, while the IRS focuses its face-to-face audit resources on more affluent individual taxpayers, there has been a magnified reliance on automated audits that are triggered by computer data differentials, including math errors, unfiled returns and income discrepancies where income on a taxpayer’s return doesn’t match income reported to the IRS by third parties, such as financial institutions and employers. The IRS does not consider these automated audits to be “real” audits; instead, it calls them tax adjustments. According to the Treasury Inspector General Tax Administration, approximately 5 million of these automated audits are expected yearly.
The problem is that when the IRS doesn’t classify these adjustments as audits, a number of taxpayer rights are not triggered. (See IRC § 7605(b).) To complicate the situation, the largest percentage of “unreal” audits focus on those with income of less than $100,000, and more than half of them are within the population that reports under $25,000 income (source: R&G Brenner Income Tax) Many in this population are unable to afford representation in resolving their disputes and may not even know when their rights are being violated. Thus, they either pay the adjustment whether it is correct or not, ignore paying the adjustment which racks up penalties and interest, or drag themselves and their tax professional through the arduous task of refuting the adjustment.
With so few IRS tax professionals to answer questions, taxpayers typically have to wait a minimum of 6 ½ weeks to receive a response from the IRS. On that timeline, these “unreal” audits can suck up inordinate amounts of very real time and money.
Audit Assistance, part of the Client Benefit Suite, is a program designed to help save you and your clients time by providing your clients with support in the event that the IRS audits their tax return or denies their credits.
The program provides personalized assistance in the event of an IRS Audit:
- Correspondence & communication support for IRS audits or inquiries
- Help with IRS forms including Schedules A, C and E
- Assistance with denied credits
- IRS identity theft support
- Help resolving tax penalties or interest
- Coverage for up to three years
Identity theft assistance is an increasingly important part of this coverage. According to Javelin Strategy & Research’s 2014 Identity Fraud Study, a new identity fraud victim was hit every two minutes. Identity theft can wreak havoc on a tax return and your finances in general. The Identify Theft Restoration Services covered within Audit Assistance help you provide even greater support to your clients including for incidents beyond IRS Identity Theft. These services include:
- Customized state specific ID Recovery Kit™
- Fraud alerts on your credit records
- Daily credit monitoring for up to six months
- Coverage for up to one year
There is no cost to the preparer for Audit Assistance. At $44.95, it’s a wise investment for your clients and one you can feel confident in recommending. They will appreciate the peace of mind, and you’ll benefit too. For every client that you enroll in Audit Assistance, you’ll receive $10.
Audit Assistance will be integrated with Intuit ProSeries® and rolled out this fall, available for you to offer your clients. Audit Assistance is also a part of a new suite of resources available this year called Client Benefit Suite. For more information around the suite, click here.