What can the IRS look at?

[OrangeHeat]

Any tax experts tell me what the IRS can look at during an audit???

Thanks,

Orange

[cardcounter0]

A similar example:

Q: Where can a 800 lb. gorilla go?
A: Anywhere he wants to.

Actually the IRS doesn't have to look at anything. The burden of proof lies on the Taxpayer.

Here is how it goes:

IRS: You owe us $10 million dollars.
YOU: No way. I can't owe that much.
IRS: Prove it or we will seize everything you own.
YOU: Okay, well here are these records and these reciepts.
IRS: Okay. You only owe us $5 million dollars.
YOU: Wait a minute. Here are some more records.
IRS: Okay. So you owe us $1 million dollars.
YOU: Let me see what other documents I can give you ...

[OrangeHeat]

very helpful.......

[Thythe]

He is correct, though. The IRS uses the standard "guilty until proven innocent."

[OrangeHeat]

Actually the reforms in 1998 changed that - it is no longer guilty until proven innocent.

I found what I was looking for:

Unreported Income

1-6.20 In business audits, the primary focus is to find unreported income. Two methods are used to find unreported income: (a) cash reconciliation, and (b) net worth method. The cash reconciliation method requires all bank statements and savings deposit passbooks be analyzed for income and expenses. The Revenue Agent will analyze all deposits and compare those deposits to gross income reported on the tax return. He will then discount for non-taxable sources of income and transfer of funds between various accounts. A second method of determining under-reporting of income is the net worth method. This method requires analysis of the changes in the net worth of the taxpayer and a comparison of changes in income reported on the tax return. For example, if the value of the taxpayer's cash in the bank had increased by $20,000, the amount of stock he owned increased by $10,000, and he had acquired a $10,000 car in a particular year for cash or cash equivalent, that taxpayer better have reported at least $40,000 in income or have some explanation as to the alternative sources of those funds.

Orange

[mmcd]

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1-6.20 In business audits...

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[cardcounter0]

"The cash reconciliation method requires all bank statements and savings deposit passbooks be analyzed for income and expenses. The Revenue Agent will analyze all deposits and compare those deposits to gross income reported on the tax return. He will then discount for non-taxable sources of income and transfer of funds between various accounts. "

The Agent will have all your bank account statements. The bank is glad to give them to him, and since you can't open a bank account without social security, he probably already has them. He will then carefully go thru the statement and add up all deposits, ignoring all withdrawls. So if you put $100 in the bank, take it out, and a few days later put that $100 back in, the agent will record $200 worth of income. The discount for non-taxable sources or transfer of funds will initially be set at 0% because a simple deposit transaction on a bank statement does not indicate what the source was or if it was non-taxable. The Agent will then claim you owe taxes on some totally outrageous amount of income. At that point, you need to start providing the documentation to prove him wrong.

>>>>>>>

(b) net worth method:

The agent will briefly drive by your house. The next day you will get a notice that you must own about 50 million dollars worth of stuff. Time for you to start providing the documentation that you don't own a $250,000 Porshe, it is actually a $250 Ford Granada.

[Ulysses]

I've had a few friends go through this process recently and it's not that far off from what cardcounter outlined in his initial response.

They have relatively easy access to any financial info - this includes Neteller debit transactions, checks cashed to your name at check-cashing places, etc. Today's financial databases are scary. Post 9/11, lots of databases are scary.

They will sometimes want to do a walk-through and they can and will take into account things like new electronics and furniture that you have.

They will look at credit card bills and loans and see if you have paid any off recently.

You get the idea. They are quite aggressive in terms of claiming how much you have made and the burden of proof does fall back onto you.

In terms of results, the key is whether or not it looks like you tried to hide it from them. If you just underreported a little or got overaggressive with the deductions, you'll usuually just have to pay back taxes and minor fines. If they see a bunch of transactions that look like you're trying to hide income (for example, they somehow find out that you had a friend in Canada cash out for you or they somehow find out you've been winning a lot at the cardroom and keeping cash in a shoebox), you then will face severe fines (and possibly even jail time).

[OrangeHeat]

Your an idiot - they can use the same methodology on personal audits.

Orange

[Ulysses]

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Your an idiot

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Heh.

[OrangeHeat]

Continuing on the research - you can actually be obstinate and not let them in your house without a warrant.

I no think this is a good line to take though - pissing of the auditor is probably bad.

Orange

I reported everything last year so I'll have to do the same I guess. Going back to no reporting would probably be enough in itself.

[cardcounter0]

Yes. This is true, part of the new 'kinder, gentler IRS'. They got their hand slapped when they yanked Red Foxx out of his cadillac by his hair at a stop light. /images/graemlins/grin.gif

I would estimate it would take IRS Agents approximately 15 minutes at the most if they really wanted to obtain a warrant after you refuse to allow them to enter. At which time they will probably be accompanied by M16 carrying ATFs, DOJ, a FBI swat team, and a Park Ranger who happened to be in the area.

[wayabvpar]

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pissing of the auditor is probably bad

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The last thing you want is the IRS's undivided attention.