Inviting IRS to audit you

By John Bullis
The Nevada Appeal
June 21, 2011

IRS does not have the people and resources to audit every individual income tax return. It varies, but about 1 percent of all returns are audited each year.

IRS has a good computer “matching” program. They record information from banks and companies that pay you under your Social Security number. Then, when you file your return, the computer looks to see if you reported all of the income the IRS has knowledge of.

You are inviting IRS to audit or at least send a notice if you don’t report all of the forms 1099 on your return.

Now, some forms — 1099 — are issued in error or by mistake. If you get a form that is not correct, contact the folks that sent it to you. Ask for a corrected form.

The forms are sent to you about the end of January or so, but IRS is not sent the forms until later — the end of February or so.

Some forms are from stock brokers about sales of stock, bonds, etc. The information sent to IRS only covers the sale part of the transaction. Your cost is not sent to IRS. You have to claim it on your return.

By the way, the original cost of the stock plus dividends you received in the form of more shares is the tax basis you can claim. We suggest a “spreadsheet” listing is best to show the total cost and dividends reinvested and show the total number of shares.

The problem with a form 1099 that is not correct is it is time consuming and no fun to get a corrected form. On the other hand, it is easier to correct than to deal with the IRS audit or Notice.

Just like we suggest every IRS Notice should be responded to in a timely manner, it is important to work on getting the corrected form 1099 as quickly as possible.

That means you need to keep your own records in most cases, to know if the form 1099 you received is correct.

All returns are open for audit or you can amend (correct) your return for three years from the filing date (as a general rule). Save all of your tax records for at least four years. IRS doesn’t start the matching program, doesn’t send Notices, etc. until about a year or so after you file the return, sometimes later than that.

Don’t get upset if you get an IRS Notice or audit. Just deal with it in a timely manner or get help to respond correctly.

Did you hear “You are not responsible for the thoughts that pass your door. You are responsible for those you admit and entertain.”