Audit Risk Meter™

[Jesse]

How can Turbo Tax claim to reduce your chance of an audit?
Anyone have any experience as to how their audit meter works?

I've had a couple clients call and ask if I have an "audit meter", the season has only begun and I think the older I get the less patient w/ certain people I become.

[Kram BergGold]

Jesse

I have an audit meter. It is in my brain and has been honed with 32 years of experience.
I have predicted 2 of my last 4 face to face audits. Paper audits are too unpredictable to project.

[Jesse]

I have an audit meter. It is in my brain and has been honed with 32 years of experience.
I have predicted 2 of my last 4 face to face audits. Paper audits are too unpredictable to project.

Just curious,
What made you predict that these two would be audited?
Were they business or nonbusiness audits?
In your 32 years approx how many audits have you gone through?

[DaveO]

I'm with KramBergGold

I can't claim 32 years of experience yet. I have a client that I have been warning for years they were at extreme audit risk. Huge 2106 deductions, large charitible and a big loss on a "C" year after year. Well it finally happened but to my surprise the client actually had records for most of what they claimed and I was able to find some additional deductions along the way. Settled the audit for just a few hundred dollars more.

But to answer your question all TT does is compare your to averages for your region adjusted for your income level. That information is readily available. I don't like to share it with clients because a few get the idea that those are "freebie" numbers.

[Nashville]

Thresholds

Anyone have any experience as to how their audit meter works?

Jesse, my best guess is their program measures how the taxpayers' numbers match up with certain "thresholds." These thresholds have been around for years and are updated. They may be expressed as a single dollar number or as a percentage of AGI.

Here is an illustration. IRS audit guide has a formula whereby a taxpayer whose AGI is $70,000 should be claiming no more than $5,000 for charitable deductions. Extreme excess of a single threshold, or virtually any excess in two or more thresholds gets the return thrown into an enhanced pool for audit selection.

I foresee hilarious results with this "audit meter." It will most likely be superimposed in the corner of the screen, with a green light. The taxpayer will test his numbers, particularly in itemized deductions or in Schedule C, E, F deductions. $3000 means the meter remains green. $5000 turns it yellow as the meter needle reads straight up. $7000 turns the meter glowing red, and at $10,000 Chuck Barris comes out and swings the hammer in a scene reminiscent of the "Gong Show" while the meter swells up to take up the entire screen and it's needle is all the way in the red zone like a pressure gage in a disaster movie.

My prediction is that taxpayers at present have no idea how much they can take without raising the red flag. Now this "audit meter" takes them where they want to go. When I ask my clients about medical expenses, some of them will answer "Just write down as much as you think I can get away with and not risk an audit." So there is a healthy and well-received market for this ridiculous "audit meter."

What are the long-term effects? Does this mean taxpayers will be taking more deductions? Less deductions? I don't know what kind of position the IRS will be taking, but my guess is that Intuit will not be programming this feature such that taxpayers will be taking more deductions. e.g. If the threshold for a certain item is $5000, their meter will start glowing at a level much less. Intuit does not want a mass audit by "audit meter" users.

[erchess]

When I was fairly new

in the tax business, I heard somewhere about a taxpayer was audited solely because the agent who saw his return found it unbelievable that he had given ten percent of his pretax income to his church and another three or four percent to other charities, some religious and some not. The agent was apologetic and the audit was over in about five minutes because the taxpayer had the receipts. The agent said bluntly that he would never have believed that someone of modest income would be so generous.

[joanmcq]

Someone at my company played with the TT audit meter; did a return with a zero income Schedule C with very high expenses, had negative taxable income, etc. etc. and the result was no risk, but they may want to look at your $1500 of charitable expenses (!). I'm going to play with it a bit later and see what happens. Put in more EBE than wage income, maybe a big farm loss, and maybe try the million dollar withholding error. Somehow, I think it may lull taxpayers into a false sense of security.

[JohnH]

Reminds me of a client

Whenever I see a post like this, it reminds me of a client I had years ago. We were reviewing his return and he casually mentioned that he could probably get a larger refund if he deducted his contributions, but he didn't like the idea of taking the deduction because he preferred to not "let the left hand know what the right hand was doing". He felt there was something wrong about dwelling on the figure and using his charitable giving to reduce his taxes.

I pressed him about it and he finally brought me his contribution statement - learned he was regularly giving well over 10% of his income to his church. I finally convinced him that if he felt that strongly about it, I would tell him how much the contribution deduction saved him in taxes and he could give THAT to his church as well.

Every year after that (until he died), I'd prepare his return, then do a separate calculation without the contributions deduction, and tell him what the difference was. The next year there would be an extra check on his contribution statement for the figure I had provided him, usually written right after he received his tax refund. If he had ever been audited, I probably would have handled it for free just to see the expression on the auditor's face when I explained the situation.

There should be more people in the world who have that client's level of commitment.

[ChEAr$]

It's uncanny

Whenever I see a post like this, it reminds me of a client I had years ago. We were reviewing his return and he casually mentioned that he could probably get a larger refund if he deducted his contributions, but he didn't like the idea of taking the deduction because he preferred to not "let the left hand know what the right hand was doing". He felt there was something wrong about dwelling on the figure and using his charitable giving to reduce his taxes.

I pressed him about it and he finally brought me his contribution statement - learned he was regularly giving well over 10% of his income to his church. I finally convinced him that if he felt that strongly about it, I would tell him how much the contribution deduction saved him in taxes and he could give THAT to his church as well.

Every year after that (until he died), I'd prepare his return, then do a separate calculation without the contributions deduction, and tell him what the difference was. The next year there would be an extra check on his contribution statement for the figure I had provided him, usually written right after he received his tax refund. If he had ever been audited, I probably would have handled it for free just to see the expression on the auditor's face when I explained the situation.

There should be more people in the world who have that client's level of commitment.

at times, John, to see how your and my experiences mesh, like this case.

next time I'm in Charlotte I want to come by and see if we even look alike! (grin)

[Koss]

Audit Meter

Try a return with no income except Schedule C

Make the taxpayer an entertainer or housekeeper

Enter zero expenses, and zero estimated payments

Make the income about $14,000

Single taxpayer with Head of Household filing status

and two young children who qualify the taxpayer for EIC


:-)

BMK

[taxmandan]

DIY software is a red flag itself

I helped a lady being audited who had deducted her mortgage interest 3 times on the return: Sch A, 8829 and Sch C. She used TT to save money. After I fixed that and numerous other errors on the return, she took the accurate return to the interview (she didn't want to pay me to represent). The RA called me and as we talked I mentioned that the service should audit every "self-prepared" return that has a Sch. C. She laughed and said that's what they were doing, and they were collecting big $$$ in back taxes, interest and penalties.

That lady is a faithful client who realizes now that my fees are small compared to penalties and interest to the IRS.

[Nashville]

How Blatant Can It Be

Koss, I helped out a friend at a storefront tax shop for a few nights last year.
Fat slob walked in and said she cleaned house for this rich dude.

He paid her $200/wk in cash money, no W-2, no 1099, nothing. And it was very regular, she worked every week including Christmas. She also gave us two social security numbers she said were her kids. This girl couldn't even bend over to pick up her car keys, but she could make $200/wk cleaning houses.

ProSeries screamed bloody murder, and at some point began giving me soft edits. Would not let me electronically file because of no W-2 or no corroborating information. I told her this would have to be a paper return, and she would get her money in about 5 weeks. My friend told her that the tax prep fee ($50) could not be taken out of the refund since it was going directly to her. So we needed $50 up front for some $2800 in refund.

She stomped out, about 7.4 on the Richter scale. We looked at each other. "She won't be back, he said." And she never did. Maybe she found another sucker.

All too obvious, and all too common you say? Of course it is, but this ISN'T the kind of fraud and abuse the government is wanting to stop.

[JohnH]

Look alike?

Harlan:
Let me assure you - for your sake - that you should hope we don't look alike...

But feel free to come by when you're in Charlotte

[joanmcq]

Ok, I went though, one kid married couple, only income was $14000 Sch C, EIC. Audit risk very very low. They did flag the EIC and said not to worry, but sometimes people will claim the same dependent for EIC.

Ok, now I did a really nasty return. Sch C with $140 in income and huge auto, travel, M&E and other expenses. Wages of $60K, large mortgage & charitable. Still got EIC. Now the audit risk was 'medium' right in the middle. Flagged all of these things but said soothingly, 'now this doesn't mean you can't take these deductions, but make sure you keep good records, etc'.

They don't audit all of the self prepared Sch Cs..they should the self prepared EBEs though!

[Koss]

Paper return??

ProSeries screamed bloody murder, and at some point began giving me soft edits. Would not let me electronically file because of no W-2 or no corroborating information. I told her this would have to be a paper return, and she would get her money in about 5 weeks. My friend told her that the tax prep fee ($50) could not be taken out of the refund since it was going directly to her. So we needed $50 up front for some $2800 in refund.

Under the regs and protocols currently in effect, and those of last year, that return could have been filed electronically. Maybe ProSeries or the backend e-file vendor has some additional restrictions that I don't know about. But in terms of IRS requirements, there is nothing that would have stopped that return last year.

I am certainly not talking about a RAL. I am commenting only on the question of whether the return is eligible for electronic filing. It is.

Whether the return is paper filed or electronically filed, there is absolutely nowhere on the return that you provide to the IRS the EIN of the payer on a Form 1099-MISC. And many taxpayers are legitimately self-employed and do not receive a Form 1099-MISC.

Historically, the banks have declined a RAL when the only income is Schedule C, there are no estimated payments, and the entire refund is EIC.

If you are taking the name and EIN of the payer from Form 1099-MISC, and entering this data on Schedule C, then you are making a serious mistake. Many people who are self-employed do not have an EIN. The EIN field on Schedule C should be left blank. If you were filling it in with all nines or all zeros because she didn't have a Form 1099-MISC...

Well, that means that you don't understand the function of the EIN field on Schedule C.

I'm not saying you should have filed the return. If you felt that it had a badge of fraud, then you probably did the right thing. But procedurally, that return could have been filed electronically.

BMK