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MORE ON E-FILING AND AUDIT RISK
July 26, 2007
Reader Eric Januzelli writes in response to our post on why extending and e-filing probably have little effect on your chances of being audited:
The second page of this IRS report explains why the Paper vs. Electronic question is irrelevant. As you stated in your post, IRS auditors are attracted to Schedule C losses. The agency thinks almost 60 cents out of every Schedule C dollar is unreported (Nonfarm proprietor income). Since both employees and employers report wage income (even paper filers submit a W-2), the error rate there is only 1 percent. The turning point seems to be whether income/expenses are verifiable, not how the return is filed.
When the tax gap is supposedly $345 billion, it's amusing the IRS spends its time going after Schedule C losses of a few thousand here and a few thousand there.
Why? I suspect it's for the same reason Willie Sutton robbed banks - that's where the money is. The Schedule C tax gap isn't from a few thousand taxpayers underpaying millions; it's from millions underpaying thousands.
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