OMG! The Dreaded Tax Audit

If there’s one phone call or text from a client that I’d rather not get, it’s that panic-stricken voicemail or all-caps text message telling me that they just received the dreaded tax audit letter from the IRS. I completely understand the emotions. Just the sight of the IRS logo on the envelope is enough to put most of our alarm bells into hyperdrive, even knowing that taxes were submitted on time with only legitimate deductions and a truthful reporting of income. What to do now?
Here’s a few steps to help reduce your panic and take control of your IRS situation.
Know you have the right of representation during an IRS audit. Enrolled Agents (EA), Certified Public Accountants and tax attorneys are approved to represent taxpayers before the IRS, and the EA is the only professional required to demonstrate his/her competence in all areas of taxation, representation and ethics before they are given unlimited representation rights before the IRS. Tax attorneys and CPAs are licensed by the state in which they practice and have limited representation rights (see the disclaimer below).

It’s good to know your rights during an IRS audit. They are spelled out in plain language in IRS Publication 1 available here.

Stay calm and prepare your records. Paper and electronic records should be kept for a minimum of three (seven, in some cases) years from the date the tax return was filed. If on paper, gather your documents for the stated audit year and organize them into logical time periods. Make sure your check registers are up-to-date, and meaningful receipts are in hand. We can’t represent you, but we can help you organize these things in advance of a meeting with someone who can.

Most importantly, don’t panic. There are many reasons certain individuals are chosen for an audit. It could just be a random check, a typo on your return, missing documentation or a wrong or missing form. High charitable donations above and beyond your normal philanthropy are red flags to the IRS, and so are spikes in deductions, even though they may be completely legitimate.

(The Dreaded Disclaimer) We must advise you, based on current IRS rules and standards, that any advice contained in this article is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to tax audits, so don’t rely on it as qualified tax and accounting advice. This article does not fall under the guidelines of IRS Circular 230. Remember, if you need help, we’re happy to refer you to a qualified EA or an approved CPA or tax attorney.

Can Money Buy Happiness?

Bo Derek once said “Whoever said money can’t buy happiness simply didn’t know where to go shopping.” But really, can money buy happiness?

According to a study done in 2015 by Case Western University money makes people happier—up to a point. For example, a poor family just getting by at $25,000 a year who then makes $50,000 a year will be less nervous, hopeless and restless. Take this annual income to $70,000, and they will experience greater happiness and reductions in mental illness. Make over $70,000 and the positive emotional gain continues, in smaller increments, for a time. But then something odd happens.

Somewhere around $80,000, those incremental positive emotions become smaller and less frequent until they actually disappear. By the time this now-wealthy family is making $90,000 a year, the money no longer has a palpable influence on happiness.

Gallup agrees. They analyzed a study in 2010 that saw rapid improvement in the happiness factor until around $75,000. After that income level, folks began to care less about making money and caring more about how successful they were “living” their lives.

The study was used to justify the rich giving to the poor in the form of taxes under a big government redistribution scheme. It leaves out an important factor about happiness. With exception, most of us are poor starting out in life. But we get an education, work hard and get promoted, or start a business and become successful. In other words those positive emotional gains come to us through effort and endurance, not handouts. The peak of emotional happiness is a natural progression from startup, to growth, to expansion, to maturity.

Money can’t buy happiness, but the honest effort to make money to give yourself and your loved ones a better life is, and always will be, a worthy goal.