PROTECT YOURSELF FROM NEW AUDIT RISK
YOU may be audited within the next -5- years.
A) WHY ARE YOU THE AUDIT TARGET? Because …
New York State is mass auditing 700,000 individual (not corporate) tax returns per year. In 5 years, they’ll audit 3.5 million returns. New York population: 19 million. In contrast, the IRS audits only 1.25 million returns of the entire 350 million US population.
Some people receive so little income that they are not required to file a return. Children or spouses do not file their own return because they are dependents on a return. There is no need to audit the many simple returns claiming the standard deduction.
So who is left to be the targets of audits?
A few high income taxpayers and a large group of ordinary middle class taxpayers (like you!) who itemize their deductions on Schedule A. This includes medical expenses, state/local income tax, real estate tax, mortgage interest/points, charity, and work-related, investment and other miscellaneous expenses.
Other 2 Major Targets: 1) Small businesses who report income/losses on Schedule C, and 2) Rental real estate landlords who report income/losses on Schedule E.
B) WHAT ARE THE 2 KINDS OF AUDITS? (and why does it matter?)
1) In-person face-to-face field audits, 7,000 per year and 2) Correspondence/desk audits, 700,000 per year, in New York State. The vast majority of IRS, California and New York audits are correspondence audits. You simply mail your documents to an address and wait for a decision. There is no opportunity for face-to-face discussion or explanation. There is no required or standardized format. The auditor must try to understand the taxpayer’s record keeping system, while under time pressure to finish and move to the next case. If the auditor is confused by unclear documents or messy paperwork, the taxpayer loses.
The requirements for proof are difficult to meet. Success is unlikely for an inexperienced taxpayer, with no professional guidance. There are too many “gotcha” pitfalls.
C) THE NEW MASS AUDIT CAPABILITY:
1) This is a newly acquired capability, which did not exist before 2013. In 2013, the New York State Dept. of Taxation and Finance received a new IBM Watson Supercomputer.
Short description: Artificial Intelligence (AI) combined with advanced analytical software, with Constrained Markov Decision Processes; processes at a rate of 80 teraflops (trillion floating-point operations per second); employs 90 IBM Power 750 servers, each uses a 3.5 GHz Power7 eight-core processor, with 4 threads per core; total 2,880 processor threads; 16 terabytes of RAM; combined data store of 200 million pages, which it processes against 6 million logic rules; self-contained in the space of 10 refrigerators. Built for “Big Data.”
The IRS does not have a supercomputer, yet. Currently, the only other state than New York with a supercomputer and capability for mass audits is California. All states, including these two, have Information Sharing Agreements with the IRS. They automatically share the results of audit adjustments with each other. You will pay twice.
2) New York built a new department of auditors to review the taxpayer’s documents.
They are not instructed to comply with IRS rules that protect the taxpayer. For example: they use an unrealistic standard “ordinary and mandatory” which they created and which does not exist in tax law. Internal Revenue Code Sec. 162 allows “ordinary and necessary” expenses. The IRS defines the word “necessary” as merely “appropriate and helpful to your business,” specifically “NOT required,” and certainly NOT mandatory. This is just one of the ways NYS unfairly disallows thousands of dollars of properly documented and legally allowed tax deductions.
D) HOW CAN YOU PROTECT YOURSELF FROM THIS THREAT?
1) Save ALL Documentation for 7 years:
When NYS sends an audit letter, they include this sentence:
“We won’t accept Credit Card Statements without supporting receipts.” You need the credit / debit card statements AND receipts. You need your EZ pass, appointment calendar, monthly statements from banks, cell phones, internet/cable, Staples receipts, restaurant receipts with the name of who you dined with. You will need notes about business gifts you gave at work, to whom and for what occasion. You must have receipts for ALL medical expenses, charitable contributions, and business deductions.
These need not be stored in an elegant manner. You can organize and categorize your records later, when and if you need them. However, to prepare your return, you still need to summarize these receipts.
2) GET PROFESSIONAL HELP to WIN YOUR AUDIT:
If you have no experience, training, or resources, do not defend yourself alone. Use the Audit Defense Package. There is no better response than this. It has worked successfully many times, because of the defensive IRS rules, US Tax court cases, worksheets, questionnaires, etc. built into its clearly organized structure.
If you have already been audited, regardless of the outcome, you can be audited again.
If you have not been audited yet, be patient. You may get your opportunity.
This is the new normal. Now you know.
Fortunately, you have been forewarned AND doubly forearmed!
Copyright 2017 Tax Strategies, Inc. Robert Greene CPA CMA