Earlier this month, the federal government entered a sequestration period, which effectively translates to big spending cuts for certain agencies, including the IRS. While the budget cuts have let to speculation that tax refunds could be delayed for millions of Americans, the sequester could be good news for taxpayers who are concerned about being targeted for an audit.
As part of the sequester, which would remain in effect through September 30th without congressional intervention, the IRS is expected to significantly slash spending in several areas. A hiring freeze that’s already in place will likely be extended and the IRS has suggested that employee travel and training will also be limited. The agency’s more than 100,000 employees have also been advised that they may be subject to a one-day furlough per pay period, beginning this summer. Certain employees may also be the target of pay cuts or layoffs.
It’s expected that the reduction in the IRS workforce will have the biggest impact on programs designed to provide individual tax help, such as the taxpayer call center and taxpayer outreach programs. Taxpayer assistance centers are expected to operate with fewer staff and cut operating hours, which means you can expect a delay if you have questions about your taxes or need help with your filing. It’s also expected that stuff cuts could have a tremendous impact on the audit process.
Each year, the IRS screens tax returns individually for audits by comparing them to certain “norms” for similar returns. For example, they may compare the type and amount of deductions you claim with data from taxpayers in the same income bracket. An auditor will go over your return to look for any errors or questionable data and it’s then forwarded to an examining group. The manager will then review the return and make a decision as to whether it should be accepted or returned to an auditor. At this point, the auditor can accept the return or contact you for further information. The IRS has three years from the annual filing deadline to initiate an audit and it typically takes about 18 months for individuals to be selected. With fewer staff on hand, it seems likely that the selection process could take even longer, meaning returns may be subject to less severe scrutiny.
While the sequester may slow down the audit process, it doesn’t mean you can afford to be sloppy in your tax filing. Simple math errors are one of the biggest reasons a return is selected for an audit so it’s important to go over your figures carefully before you file. If you’re itemizing deductions, you’ll need to make sure you can back up your claims with receipts or other documentation. This is especially true if you’re claiming substantial deductions for business expenses, self-employment expenses or charitable donations. While the prospect of fewer audits may be tempting to taxpayers who are looking to boost their refund, it could end up costing you more in the long run if you get hit with interest and penalties. Making sure your information is organized, well-documented and entered correctly can safeguard your name lands on an IRS audit list.