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Insights from the Team

Do Audits Actually Increase Tax Compliance?

“The government has been trying to figure out how small-business owners can be persuaded to report their earnings more accurately. More audits may not be the answer.” – Taxman Client

Most taxpayers dread the word “audit.” Small-business owners can be especially hard-pressed to provide effective documentation, leaving them vulnerable to such audits. And yet, the New York Times discovered, it may not be as effective as a deterrent to tax evasion as the IRS would hope.

“The agency estimates that it collects $458 billion a year less in taxes from all Americans than the Government is actually due,” writes Stacy Cowley. This probably isn’t news to most of us. However, it may surprise you to find out that “those suspected of tax dodging tend to cluster in certain geographic areas.”

This may make it a little easier for the IRS to target taxpayers for audit. But “for those who dodge their taxes and get caught, the sting seems to fade fast. In the years right after an audit, taxpayers who had to make additional payments appeared to become a bit more compliant, but the effect diminished over time and disappeared entirely by Year 5, another study found.”

What do you think? Is the threat of an audit sufficient to keep you on your toes? Have you ever been audited? If you’re facing an audit right now, let me know— even people who didn’t end up owing anything, like Rebeca Mojica, “estimates that she spent $500 in accounting fees and 15 hours of her and her staff’s time dealing with her 2011 audit. The process lasted seven months.”

Read the full New York Times article here.

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