Why Do People Fear Tax Audits More Than They Fear Overpaying?

Ask anyone if they “pay too much income tax” and the knee jerk reaction is almost always, “Yes!” and without much hesitation. Why do we call that a knee jerk reaction? Because if you then follow the question up with two more questions, “What did you pay in federal tax last year? And/or what bracket are you in?” they almost as quickly say, “I don’t remember, or I’m not sure.” Or they might guess at a bracket percentage, but usually not correctly. We’ve even had people profess the pain of paying too much in tax only to discover that not only did they get back all of their withholdings, but they were given tax credit refunds of money they did not pay!

Why? When you ask the same people, “Do you pay too much for your cell phone, your car, your mortgage” etc., some will give you the same response, but most will say, “No, I got a good deal” and may even elaborate with details about a sale they took advantage of.

Human nature is our best guess as to why this happens, or perhaps that the tangible smart phone or car is easier to value than the intangible ability to drive to work because someone plowed the road for you before you woke up, or that the reason you have a job is because the military has kept you free!

Our quest continues, so if the tax bill you pay is the biggest, worst thing in your budget, and you spend many hours looking for deals when spending money on cars and homes, then why do we have so few clients allow us to proactively shop for tax credits, tax deductions and other breaks on their behalf during the year and not just 10 minutes before the filing deadline? The most common answer we get is, “Oh, well I don’t want to cause an audit!”

An Audit?! Oh no, lions and tigers and audits oh my, lions and tigers and audits oh my! Like the wicked witch in The Wizard of Oz, stirring her smoking caldron, We can hear her threat, “I’ll audit your taxes my pretty, and your little dog’s too!”

Often, we ask our self-employed clients if they work from home, and these days many say yes. But the follow up question, “Do you take a home office deduction?”, is often answered “No! I don’t want to trigger an audit!”

The IRS recognized several years ago that so many people legitimately work from home that they created an option to file a Home Office EZ form (the home office deduction is now only available to self-employed individuals). You put down the square feet of your apartment or home and the square feet of the home office room you use and check EZ, and the IRS does not require any additional information or proof of expenses, and they give you $5.00 a square foot without question (maximum 300 square feet)! They aren’t going to audit an EZ form. EZ forms mean you don’t have to be bothered with record keeping!!

There are many proactive, legal and ethical things that can be done to lower peoples’ tax burden. Others require extra record keeping and effort, but if the taxpayer does a good job at those simple requirements, then responding to a letter audit can be as simple as emailing or faxing the records to the auditor, often avoiding a face to face meeting. If you are missing required records and they “disallow” the deduction, you simply owe a little refund back with some penalties and interest. It’s not a colonoscopy, it’s “Audit disallows $2342.18, please pay us $234.00 more tax and a few dollars in penalties and interest.” The end.