IRS random-selection audits can be harrowing

The IRS selects income tax returns for audit and for questions based on a special program. Returns selected for audit have been shown to likely have mistakes, problems and errors.

Only a few thousand returns are chosen by true random selection. Then IRS does the most detailed audit you can imagine of those returns to help design the selection process for other returns to be audited.

One of our clients recently suffered through an IRS audit that was chosen by random selection. We were successful in limiting the auditor’s time. There are times you really need special help, and this is one of those times.

The IRS auditor was a CPA who had worked in public practice at least six years and has worked for the IRS for about five years. She was knowledgeable and extremely detailed in her work papers and analysis work. She had a 2-inch binder with all her findings.

She looked at all deposits to all of the bank and investment accounts for 2011, as well as December 2010 and January 2012. Her goal was to understand all receipts and what they were for, and if the receipts were properly reported on the income tax return, use form 1040. She knew her manager and his supervisor would review her work.

Because the taxpayer was operating a sole-owner business, she selected several invoices at random and traced them through the business record and to the tax return. She paid particular attention to returns and bad debts, tracing several of those items as well. She worked hard to understand the business and the records.

She selected some invoices for expenses at random and traced those through the business records to the tax return. She interviewed the taxpayers and the employees were involved in keeping the business records.

Because the taxpayer has a couple of residential rental properties, the auditor required evidence of ownership and used the Internet to see if the allocation of the purchase price between land and building was reasonable. As you know, there is no depreciation expense for the dirt that does not wear out.

It is a shame the taxpayers suffer the cost of time and fees to handle the random-selection audits. The extra work is all for the IRS’s benefit. I guess it is sort of like jury duty. As a citizen, we may be required to give days of our time at practically no pay.

In this case, it all turned out with the audit result of “no change,” and the return was accepted as filed. Our clients were relieved, but they did not enjoy the experience.

Be sure to save all of your tax records for at least four years after filing. I hope you do not ever suffer the IRS random-selection audit.

Did you hear? “You know you are getting old when everything either dries up or leaks.”