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WHAT GETS YOU AUDITED?

July 23, 2007

Mark Minassian has advice on avoiding audits at About.com. He suggests that you you can reduce your chances of getting audited in two ways: by extending your return and by filing a paper return, rather than e-filing.

His logic on extensions:

The IRS generally has three years to audit a tax return from the date it is filed. Since most businesses have a December 31 year-end, most business tax returns are filed on either March 15 (for corporations) or April 15 (for partnerships and sole proprietors). The IRS has to move quickly to select returns for audit, and since they will have a large population of returns to choose from among the March 15 and April 15 filers, it make sense to not include your business' tax returns in that group

This seems doubtful to me. I have never received an audit notice for a return filed without an extension prior to the due date for extended returns - with the exception of returns requesting refunds large enough to trigger an automatic "Joint Committee" review.

Also, extending the return date extends the three-year audit window, so there is no more urgency to get to the timely returns than the extended ones.

As best I can tell, the audits typically begin about a year after the due date, giving the IRS plenty of time to process even extended returns.

Here is the logic for paper filing:

E-filed returns can be easily data-mined and analyzed by IRS computers and it makes it all that much easier for those returns to be selected based on the IRS audit criteria. Also, since paper-filed returns must be manually keypunched into the IRS computers, it can take them up to two months to process paper returns. Any delays on the IRS end usually work to the taxpayer's advantage when audits are concerned.

There may be something to the data mining argument. Yet even with paper returns, the IRS is not without data-mining tools. Even on paper returns, the critical numbers are keypunched and available for the data miners.

Is delay helpful in avoiding audits? As the IRS return selection process is a closely-guarded secret, we can't say. Few enough returns have been audited in our practice to give a meaningful sample, but there's no obvious pattern targeting non-extended returns. I'm pretty sure there's no bullpen of auditors hanging around eating donuts and waiting for a return to be processed so they can jump on it. My own superstition is that paper filing increases the likelihood of examination just because a paper return has to be touched by human hands.

IT'S WHAT'S IN THE RETURN, NOT HOW IT'S FILED

The real key to whether a return is audited isn't how it's filed; it's what the return says. In our experience 1040s most likely to get audited are those with Schedule C income, business losses, or big fluctuations in income. Business returns are likely to be audited in a loss year. And all returns are likely to be audited if they have "red flag" items, like disclosures of controversial positions. These things dwarf any impact that extensions or e-filing have on your chances of being audited, which normally is pretty low to begin with.

In any case, if you can take a tax position that helps you and is supportable, you shouldn't worry about an audit. While they aren't fun, don't give the IRS money they don't deserve just because of the off chance that they might look at it - unless, of course, there's something else in the return that's much more troublesome.

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