How to Survive an Audit – More Info!
After my last post, I decided there was a little more information you might need regarding how an IRS audit might be triggered.
The IRS has 3 databases – The Individual Master File, the Individual Return Master File and the Automated Under Reporting System. By combining data from these three systems, the IRS is able to trigger audits specifically for you.
The Individual Master File (IMF) contains your personal information and all income information reported each year for you – your w2’s, interest income, 1099’s, etc. – are all captured in this one file.
The Individual Return Master File (IRMF) contains the information for your completed tax returns for each year you have filed. It even notes what returns you have not filed.
The Automated Under Reporting System (AUR) is created by combining the information in the IMF and the IRMF. The AUR compares the information reported on you with your tax return details for each year.
If there are any significant differences – for example, you didn’t report $1,000 in Unemployment Compensation – you may get a letter saying the IRS has amended your return. Worse, yet you may get a letter inviting you to visit them and bring your last 3 years returns and supporting documents.
Nervous Business Man
Recently, one of my client had missed reporting a significant amount of interest income on her tax return. (She had not received the 1099-INT for the interest income). The AUR System caught the error and she was called in for an audit. This also triggered an audit of her small business as well. The examiner requested that she bring her 2008 and 2009 tax returns and supporting documents for review.
As a result, my client probably spent 8 hours getting ready for the audit and another 3 hours at the audit plus 4 hours of my time to help them review their returns and attend the audit with them. This caused her time, money and aggravation all because of a missed Interest income statement.
Your takeaway on this is to create a system for gathering all of your tax documents in 1 place each year and to be consistent with it. Also take time to compare the documents from your previous years tax return to the items you’ve received or should receive for the current year. This will help you make sure you haven’t missed anything as you go to have your tax return prepared.
Hopefully this gives you a better understanding of how some audits come about and how you can avoid being singled out specifically.
If you have any questions, please feel free to give me a call at 240-356-5050 and also feel free to make relevant comments to the blog.
To Your Financial Health
Written by JFleming
James Fleming is an accountant and Certified Tax Coach with over 40 years experience working in and with small businesses. His company, Fleming Financial Solutions offers tax planning and preparation, bookkeeping, business and marketing consulting.