Intro to Audits
Attracting an Auditor
If you told someone that if they put there hands close enough to the fire they would burn their fingers, they would wait for you to leave and then put their hands in the fire to see if you were telling the truth. Humans are capable of doing the most irrational things in the world. Preparing their taxes in a way that would guarantee an audit is one of them. We all have friends who pride themselves on knowing ways to skim off their taxes. But come tax time they all pay their taxes because they know that the government will catch them. Its no big deal that one person in Wichita, Kansas skims off their taxes to save themselves $3500, but when these things become a pattern than the IRS starts to take that into account. One person can always get away with it, but not for long.
A few ways to raise the suspicion of the IRS for an audit:
- Have the tax prepared by a tax professional that is renowned by everyone you know as the "tax savings" guy. He is capable of getting you tax credits and deductions left and right. He will give you situations where you never thought that tax savings existed. He will tell you about loopholes and then he gets you a fat refund back that would guarantee another vacation to Disney world come summer time for you and the kids. But guess what after you get audited and pay off the taxes you originally owed on those phony tax credits and deductions plus the penalties, you and the kids wont be going anywhere near Disney world for a long time to come.
- Put your money into a trust that is actually in the name of your lower income cousin or family member. The dividends off the trust get taxed at lower tax percentages and you save thousands of dollars over the years. This never works out because the income is taxed at the tax bracket percentage of the person who earns it. The IRS finds out and you have to pay thousands of dollars once again on taxes owed and penalties. Gift tax also applies in situations where you are transferring money to another relative. The tax court or Appeals will never buy the legitimacy of this trust and never allow it to be set up.
- There is a $5000 frivolous claims penalty for people who go to court for not paying their taxes and introduce arguments that have been seen and judged by the courts already. People who claim that its their constitutional right not to pay taxes are wrong according to the courts that have already ruled in favor of IRS.
- Tax shelters like foreign trust funds where the money is transferred overseas and the U.S. government never sees a penny of it. The government is very strict about this also and has allied with various nations to allow the U.S. to tax the individuals who have made the money in US.