E-filing leads to higher audit risk?

[BHoffman]

"Finally, the Big Question: Does e-filing raise the chances of an audit? There isn't any hard evidence either way. Some e-filing fans, like Doug Stives, a CPA from Red Bank, N.J., think it keeps taxpayers "below the radar." But a 2009 report from Congress's Joint Tax committee linked e-filing to a higher overall audit rate, saying the cost savings made the IRS "better able to make use of its computer infrastructure to target returns with audit potential."

From here:

http://online.wsj.com/article/SB10001424052748704396504576204522429318798.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsThird

[Burke]

I wouldn't doubt that it would free up personnel to do other things. But the "red flag" issue -- seems to me -- would be present no matter what the method of filing. There are also those who believe that if you file an extension and wait until the last minute to file, that it reduces the chance of audit. I don't believe that one either.

[JohnH]

I have read some convincing arguments that filing in Oct reduces audit risk slightly. Ive always leaned in that direction, but of course there's no proof either way. However, the reasoning was based on certain quirks related to the paper filing process, so I'm not sure it will hold up since e-flinging has been mandated. I definitely believe e-flinging greatly increases audit risk as a general rule, and that has been the case since the day it began.

[Burke]

............. e-flinging.......... has been mandated............

LOL. Love your terminology.

[bgiez]

LOL. Love your terminology.

My first chuckle of the day

[taxea]

My take is that the reason why the IRS is heading toward 100% efiling is because they are updating their computers so that more comparisons can be done by computer, which I am sure will cause more letters being automatically generated causing a headache for all of us. The detail put into the tax return that explains the deduction will probably be totally missed by the computer thus generating a letter. One would hope that they would set up the computer so that an IRS employee would have to verify the need for audit before making us, preparers, look like we made an error.
The more sophisticated the computers get, the more audit letters go out because, in my opinion the thought follow through is not thorough enough.

[ChEAr$]

IRS says the efiling has absolutely no impact on audit potential. I also see no reason why it should.

As for waiting till Oct 15, IRS still has three years for an audit, so that doesn't hold water.

The term "eflinging" must be a Nawth Carolina thang, for one of my good friends up in Danville, Va, just on the NC line, has been using that term for years now. And he doesn't even do it! lol

[JohnH]

Yes, if you're referring to a former IRS agent, specialist in non-profit organizations, and all-around sharp wit, then you have correctly identified the person from whom I borrowed the term. That's my story and I'm sticking to it, even if I never see the back of my head again.

[ChEAr$]

Yes, if you're referring to a former IRS agent, specialist in non-profit organizations, and all-around sharp wit, then you have correctly identified the person from whom I borrowed the term. That's my story and I'm sticking to it, even if I never see the back of my head again.

You know him I see.

BTW John, we're all gathering in Myrtle Beach, SC May 16-18 for some CPE and camaraderie and good cheer(s). anyone else from NC and SC reading this ought to consider attending. Some great speakers.

[FEDUKE404]

MORE risk?

I have read some convincing arguments that filing in Oct reduces audit risk slightly. Ive always leaned in that direction, but of course there's no proof either way. However, the reasoning was based on certain quirks related to the paper filing process, so I'm not sure it will hold up since e-flinging has been mandated. I definitely believe e-filing greatly increases audit risk as a general rule, and that has been the case since the day it began.

Please explain your reasoning to support this statement.....

Although I don't have any "facts," one would think a return already cleaned of some types of errors (math and some theory) through a required software preliminary efile check might perhaps wave LESS of a red flag to the IRS than a paper return that bounces like a rubber ball when some data clerk starts entering the numbers.

I would put it into the category of "If this young single guy is confused enough to claim a standard deduction of $13,600 now while we're here let's see what ELSE is worth looking at!!"

FE

[BOB W]

Efiling frees up personel from data entry, that is all. Info gets into IRS computers quickly and allows quicker analysis of filed returns for audit potential. Over an18 month time period it all balances out anyway. It could be said that the money saved on data entry personel could go the audit review personel is probably a good one. Thus maybe more audits. But to claim the efiled returns are more likely subject to audit, I don't think so.

Having said that, efiled returns allows audit reviews to start sooner that mailed in returns or extension returns. SO it all depends on IRS resources that are allocated to audit functions.

[JohnH]

Please explain your reasoning to support this statement.....

Although I don't have any "facts," one would think a return already cleaned of some types of errors (math and some theory) through a required software preliminary efile check might perhaps wave LESS of a red flag to the IRS than a paper return that bounces like a rubber ball when some data clerk starts entering the numbers.

I would put it into the category of "If this young single guy is confused enough to claim a standard deduction of $13,600 now while we're here let's see what ELSE is worth looking at!!"

FE

I'll try to explain without writing a book here or getting too far up on my soap box. First of all, an obviously erroneous return is going to get pulled and corrected for math errors. I don't consider that an audit. Secondly, document match notices are a type of audit, but again those are just normal processing issues having nothing to do with when or how a return is filed. Then there is the issue of random audits, which again don't depend upon time or type of filing.

So the question becomes one of whether a particular type of return might be less likely to be flagged based entirely on its DIF score. I was told many years ago that returns filed toward the end of the filing season are bunched with the NEXT year's returns when being scored. Given that each year there are more and more filers, and inflation shifts the numbers up the bell curve, getting your return booted into the next year gives you some advantage if your DIF score is on the margin for the year of filing. How much of an advantage is anybody's guess since the actual mechanics of the DIF scoring process are the most closely guarded secret of the IRS. There's a little more to it, but that's more or less the Cliff Notes version of the rationale. It depends entirly upon a broad view of statistical analysis, what happens at the margins, and how it can work for or against you in a given situation. It has nothing to do with some IRS procesor personally scrutinizing a given return for reasons to flag it for audit.

Bob covered the other aspect concerning e-flinging. By becoming more efficient, IRS can speed up this process and free up personnel to devote more resources to audit issues of all types. So there's no question in my mind that e-flinging increases the audit potential of any return. It's embedded in the system - a natural outgrowth of preparers being complicit in making the IRS more efficient..

As tax preparers have fallen into line over the years and willingly become data entry clerks for IRS, we have facilitated that streamlining process. Of course, the next step is also well under way, which is to force us more and more into the role of being de facto auditors by threatening us with all sorts of penalties and placing ever heavier burdens on preparers to default to the IRS position on most questionable issues. I could go on, but you can see where my thought process is leading.

That's about it from my perspective.

[Koss]

Audit Risk

Wow, this is an interesting thread...

The WSJ article in the original post is also interesting, but it plays fast and loose with certain facts. The article raises the question of whether e-filing increases the risk of an audit, and then goes on to say that the congressional report "linked e-filing to a higher overall audit rate." This sounds like a correlation between e-filing and a general increase in the percentage of returns selected for audit; it does not sound like evidence that e-filing raises the audit risk of an individual tax return.

The article also quotes Melissa Labant, a "tax expert with the American Institute of CPAs," as saying that she e-filed her own return "through the IRS website without a hitch."

Hopefully, everyone on this board understands that you can't e-file any tax return through the IRS website. The e-file links on the IRS website re-direct to external vendors, with a very clear warning that you are leaving the IRS website.

Melissa Labant, of the AICPA, probably understands this, too. One can certainly argue that you can indeed e-file through the IRS website, by clicking the link that takes you to the vendors. But I'm surprised that Melissa didn't take the time to explain this to the WSJ reporter. The concept is important. DIYers starting on the IRS website should understand that they are submitting their data to a vendor--not the IRS. This could be seen in a positive or negative light, but it needs to be explained, and not dismissed with word games about the meaning of the word through.

The WSJ article quoted another CPA who recommends "filing the entire return on paper if one part has to be paper," which implies that it is actually possible to file part of a return on paper while part of it is filed electronically. Sounds ridiculous to me.

JohnH's explanation that returns filed late in the year may get bumped into the following year's batch when sampled for audit selection is intriguing.

On a similar note, I've heard that returns that are filed with a balance due, without a payment, that fall into a delinquent payment status, may have a lower risk of audit selection. There isn't much scientific evidence for this; it's anecdotal. But it may be based on the idea that once a return gets "tracked" into the Automated Collection System, it is somehow less likely to be selected by other automated processes, since it already has it's own special treatment. As one CPA I know put it, "those returns don't get audited; They go somewhere else."

The same might be true for returns that are filed really late, as in so late that the IRS is sending out notices that say, "We haven't received your tax return."

The general public, and even the intended readership of the WSJ article, perceives any correspondence from the IRS as an audit. And as JohnH noted in his post, document matching notices are technically a type of audit. But in our profession, we don't think of those things as a full-blown audit.

Based on the layperson's understanding of the term audit, I have come to believe that e-filing reduces the possibility of an audit, simply because an awful lot of "audits" are triggered by mistakes that get caught when you file electronically.

I once worked on a return that was filed by mail, that had an incorrect SSN for a dependent. The IRS disallowed the dependent, and adjusted the return. Instead of getting a refund, the taxpayer got a bill. As we all know, that wouldn't have happened if the return had been filed electronically. With a POA, I was able to call the practitioner hotline, and get it fixed right over the phone.

That wasn't an audit by our definition. But for the taxpayer, it was a nightmare that sure seemed like an audit, or something much worse. And I educated the guy that it could have been avoided if he had chosen to file the return electronically.

I don't even offer paper filing anymore. If a client objects, I'll certainly listen, and I respect the client's right to opt-out. But I don't think the current regulatory scheme obligates me to explicitly offer a paper return. I tell my clients that the return will be filed electronically. And over the last couple years, there have been no objections. The vast majority of my clients who are getting a refund want the direct deposit in two weeks. Even those who have a balance due have come to appreciate the fact that I, not they, are responsible for making sure that the return itself gets to the IRS. I was never a big fan of mailing returns for my clients, anyway. I did it for a few, but it wasn't an automatic process in my office.

Some of my clients don't even get a paper copy of their return. They get their copy of the return on a disk or a flash drive.

BMK

[taxea]

IRS says the efiling has absolutely no impact on audit potential. I also see no reason why it should.

As for waiting till Oct 15, IRS still has three years for an audit, so that doesn't hold water.

The term "eflinging" must be a Nawth Carolina thang, for one of my good friends up in Danville, Va, just on the NC line, has been using that term for years now. And he doesn't even do it! lol

I stay Hawaii...that is pigin for I live in Hawaii and I am the one that used the term in my post. The IRS says efile, I say efiling