Amid IRS budget cuts, agency remains committed to auditing returns

In December, Congress again cut the IRS budget - this time by $346 million. The IRS is now receiving $1.2 billion less than it did in 2010. The recent move prompted late night comedian Jimmy Kimmel to joke on January 14: "The good news is [the IRS] won't be auditing as many people. So if you've been thinking of claiming your pets as dependents this might be the year to do it."

Despite the cutbacks, however, the IRS still has a budget in the billions of dollars. The IRS runs hundreds of millions of returns through computers to spot red flags and determine whether an audit is appropriate. The IRS also attempts to go after common tax avoidance methods every year. Still, 99 percent of returns remain unaudited.

This is not a license to be free with tax laws, however. If anything, taxpayers may need to be more wary when filing a return. This is because much of the cutbacks affect IRS customer service. For example, according to the National Taxpayer Advocate, over 35 percent of phone calls to the IRS went unanswered in FY 2014. Half of correspondence between the IRS and taxpayers were not answered in a timely manner. Many of the outreach programs conducted by the IRS to help small businesses and self-employed individuals properly file returns had little to no effectiveness (in 13 states there were no IRS employees focused on outreach in the Small Business/Self-Employed Division).

For taxpayers, that means small businesses and self-employed individuals must rely on the help of experienced taxpayer advocates to ensure their return is properly filed. While the IRS may be underfunded, the law does not regard this as an excuse to make a mistake on a return.

Taxpayers concerned about a potential audit should keep a few things in mind. One, the IRS tends to go after big fish - returns involving millions in income will receive more scrutiny. Two, if there are red flags in the return, such as a disparity between income reported by employers and income listed by the earner on the return, the IRS is more likely to audit. Third, if a return indicates the potential for a common tax evasion method, such as undisclosed foreign income, the chances of an audit increase. Taxpayers with offshore holdings and large assets should therefore be extremely careful when filing to avoid penalties.

The auditing process

Receiving an audit letter from the IRS is a stressful experience, even if a taxpayer has attempted to follow the law. Fortunately, receiving an audit does not need to be financially catastrophic. In fact, of all returns audited in 2013, one in eight actually received money back.

Taxpayers who have received an audit must be careful, however. There is the potential to accidentally disclose information that may result in penalties or even criminal charges. In addition, because the IRS is struggling with its high workload, taxpayers must be sure to fully comply with the auditing process to resolve the issue more quickly.

Taxpayers concerned about their return for 2015 or who have received an audit should contact the experienced tax law attorneys at Baker Law Firm to discuss their situation and legal options moving forward.

Keywords: IRS audit, 2015 tax return, self-employed taxpayers, small business owner.