If you're like most people, one of your biggest fears is getting a letter - or, worse yet, a call - from the IRS. While nobody in their right mind would find an audit enjoyable, it's usually not as bad as we fear. But if the possibility of an audit still weighs on you at tax time, consider these extreme tales of audit misfortune. Even if you do get audited this year, you can take comfort in knowing you are almost guaranteed to fare better than these unfortunate souls. (For tips on how to steer clear of this inconvenient event, see Avoiding An Audit: 6 "Red Flags" You Should Know.)

Not on His HMO's List of Approved Providers
In September, a New York court upheld an auditor's ruling that a Brooklyn man couldn't write off his visits to prostitutes as a medical expense. Forbes.com reported that the man, a tax lawyer, was ordered to pay $25,000 in taxes and penalties after his deductions of $120,000 for visits to "service providers" and purchases of pornography were disallowed. The man claimed the money was used for legitimate medical expenses based on the "positive health effects of sex therapy."
Couldn't You Wait Until the Surgeon Was Having a Sale?
Bonnie Lee, an enrolled agent and author of "Taxpertise, The Complete Book of Dirty Little Secrets" (2009), has been representing taxpayers in the audit process for 28 years. She recalls one case in which a woman was left with more than $100,000 in medical deductions due to an auto accident involving her daughter, who was left in a coma. "The auditor disallowed the deduction because it was "just too much'," Lee recalls. Shocked, Lee went over the auditor's head and got his manager to allow the deduction.

Sorry, I'm New Here
Just a year ago, Lee had another client who ran into trouble when an auditor disallowed first-year depreciation on an SUV because the taxpayer had already used the Section 179 deduction, an immediate expense deduction that business owners can take for purchases of depreciable business equipment. "The auditor insisted the taxpayer wasn't entitled to both [deductions]," Lee recalls. The auditor then consulted with two other auditors; both told her she was wrong to disallow the depreciation deduction. "I then found out she used to be the receptionist at the IRS office and had only recently been trained to do audits."

Are You Next?
Here's some good news: a very tiny percentage of taxpayers get audited, so the odds are good that you'll never find yourself in this situation. And even if you're one of the chosen few, it's likely that the process won't be anywhere near as painful - or dramatic - as you might fear.

"Most audits of individual tax returns are simple and are handled through correspondence," says Farrukh Seyar, of HR Shaikh Seyar LLP, a large CPA firm based in Houston. "You typically get a notice in the mail asking questions about item on your taxes. They provide you 30 days to write back, and if you need extra time they allow a reasonable amount of time. Once you mail the information, typically IRS take 30 days to decide and let you know of their decision."

Seyar also points out that the IRS only has three years in which to audit a return. After that, you're in the clear. However, "if no return is filed, there's no statute of limitations. The IRS can come after the taxpayer at any time, even many years later."

Audit Rumors Laid to Rest
If you're still suffering from audit anxiety, here's a little myth-busting info that might put your mind at ease, provided by IRS spokesman David Stewart. "Many people mistakenly believe filing early increases your odds of getting audited. In reality, IRS computers score every return and that is how returns are selected for audit. People who file early have no greater chance of being audited than those who file at the deadline."

And this tidbit is for all you conspiracy theorists: Stewart shoots down the notion that the IRS plants a secret code in mailing labels to target certain people. "The label doesn't have any secret code. In fact, use of the label reduces the chance of errors, which could delay your refund."

Conclusion
We're not saying you should hope for an audit, but if it does happen, don't despair. Most likely, it will simply be a matter of submitting some paperwork and perhaps, in a worst-case scenario, forking over a few bucks to Uncle Sam. But compared to the examples above, your experience will probably seem downright boring.

Related Articles
  1. Economics

    Explaining Accounting Conservatism

    Accounting conservatism is a principal that requires accounting rules be applied with high degrees of verification.
  2. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  3. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  4. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  5. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  6. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  7. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  8. Economics

    Explaining Replacement Cost

    The replacement cost is the cost you’d have to pay to replace an asset with a similar asset at the present time and value.
  9. Economics

    How Does National Income Accounting Work?

    National income accounting is an economic term describing the system used by a country to gather data and determine aggregate economic activity.
  10. Fundamental Analysis

    Understanding the EBITDA/EV Multiple

    The EBITDA/EV multiple is a financial ratio that measures a company’s return on investment.
RELATED TERMS
  1. Operating Cost

    Expenses associated with the maintenance and administration of ...
  2. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
  3. Normal Profit

    An economic condition occurring when the difference between a ...
  4. Cost Accounting

    A type of accounting process that aims to capture a company's ...
  5. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  6. International Financial Reporting ...

    A set of international accounting standards stating how particular ...
RELATED FAQS
  1. How do dividends affect the balance sheet?

    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
  2. Are dividends considered an expense?

    Cash or stock dividends distributed to shareholders are not considered an expense on a company's income statement. Stock ... Read Full Answer >>
  3. Do dividends go on the balance sheet?

    The only account recorded on the balance sheet, when dividends are declared and before they are paid out to a company's shareholders, ... Read Full Answer >>
  4. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  5. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  6. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!