How To Avoid An Audit Based On Discrimination By The IRS

IRS pick pockets your moneyIt should come as NO surprise to long time Financial Samurai readers that the IRS admitted to targeting conservative groups since Obama became President. The government already discriminates against those who make over a certain amount by charging higher taxes even though they already pay for the majority of all taxes. Meanwhile, the deductions and credits you get for things such as education and children get eliminated if you make over an absurdly low amount. Conducting body cavity searches to shake more tax dollars out of Republicans is business as usual.

Make no mistake that if a Republican was President, liberal groups would also be targeted by the IRS. Everybody naturally discriminates against everybody. Sometimes the discrimination is overt and evil, other times the discrimination is covertly done out of convenience until discovered as is the case with the IRS.

The bottom line is that people have a strong proclivity to take care of their own, no matter what. In this article I’d like to discuss ways in which people can significantly reduce their chances of getting audited by the most powerful organization in America.

THREE EFFECTIVE STRATEGIES TO AVOID AN IRS AUDIT

1) Stay neutral or aligned with those in power. If the President is a Democrat, don’t be so foolish to highlight you are a Republican. Either indicate no party affiliation or also claim you are a Democrat. America is split 50/50 between Republicans and Democrats under the popular vote and neither party likes each other at all. You need to pledge your allegiance to the winning side otherwise you will not only see stunted growth in your political career, you will also be targeted by the IRS and maybe even the FBI. Don’t underestimate the possibility of the FBI keeping more tabs on Republicans under a Democratic President and vice versa.

If you’ve studied Iranian history or watched the movie Argo, you know the Ayatollah Khomeini went after all of The Shah’s people with great vengeance. The time for fear and caution is during any regime change. In order to survive and maybe thrive, you must understand your leader’s beliefs and adopt them as your own. Convert, hide, or be oppressed.

2) Donate to charities that matter to those in power. Donating money is a great way to not only help others but to lower your taxable income as well. Donate too much, and alarm bells will sound. The key is to donate to the right charities if you have a propensity to donate much more than 10% of your overall income. In 2012, President Obama’s largest contribution was a $103,871 donation to Fisher House Foundation, which provides humanitarian services to military members, veterans and their families. Consider following suit and donating to the same cause, or similar causes in your area. You should also donate to causes dear to the US Treasury Secretary’s heart as well to charities important to the head of the IRS.

The only way I could have partied with Marissa Mayer from Yahoo at her penthouse was if I donated $500 to Ed Lee’s campaign, the current Mayor of San Francisco. $500 is actually the maximum contribution amount per event to keep money from being too much of an influence on politics interesting enough. The next time I get a debatable parking ticket, a ridiculous property tax assessment, or a noisy manhole cover near my house I’m calling the Mayor’s office!

3) Donate directly to the President. All political donations are carefully monitored so the respective party can seek more donations in the future. We’ve all gotten the endless letters in the mail asking for more money as soon as we’ve donated even $100 to a cause. The more you can donate directly to the President’s campaign the better. Let’s say you go to one of those $33,400 per plate dinner fund raisers for Obama and are a registered Democrat. There is no way in hell you will ever be audited because the person will be so infuriated he’ll never donate again!

Those who donate $32,400 a dinner generally donate even more in many ways. And those who host $32,400 per plate dinners at their houses are even that much more protected. They might even be offered Ambassadorships in various parts of the world. Even if you can only donate $500 to the President, you will likely be put on the secret “do not audit because we need his/her money” list.

STOP LIVING IN FEAR BY GETTING ON THE RIGHT SIDE

The more money you make, the more likely the IRS will target you. Take a look at the audit rate by income in the chart below.

audit-rate-by-income

Source: IRS 2011

The chance of an audit is a clear reason why so many people who have a lot of money stay under the radar. I’ve personally received three audit letters by the IRS in 13 years which is a 23% audit rate and I didn’t come close to making $5,000,000 to $10,000,000. All audits were resolved due to mistakes on my part e.g. forgetting to input the cost basis for my stock sales, double counting a mortgage interest deduction by mistake, and NY State fishing for more money even though I didn’t even work there. Mistakes are definitely one reason not to do your own taxes. But the benefits outweigh the negatives in the long run.

Although my three suggestions may sound whimsical, the point is to simply align your interests with whoever is in charge. If Madam President loves poodles, then you should absolutely donate money to the Poodle Society Of America. If Mr. President is an ardent supporter of Universal Healthcare, then write an article about the wonderful benefits of insuring the millions of uninsured if you have a platform.

I’m always going to give someone in a crowded room the time of day if she played tennis in college, blogs, and offers me a strawberry cupcake. If another fella wants to talk but loves big government, has never experienced the agony of defeat in sports, and smells worse than a crusty sock, then I’ll probably move on. It’s all about creating a connection, especially if you don’t have money to buy your way into power.

The government will eventually come for you. Do not be naive to think that just because you earn under $100,000 you’re safe. They’ll figure out ways to extend the official retirement age or tax your retirement savings more than expected. What you need to do is build a track record of giving to your leaders on both sides like big corporations do. When the day comes where they are busting down doors looking for enemies of the state, they’ll just walk on by and leave you and your family alone.

COMMON RED FLAGS THAT INCREASE YOUR CHANCE OF AN AUDIT

* Claiming a home office.

* Have a side business that consistently makes little to no money.

* Donating more than 10% of your gross income to charity.

* Making an error on your taxes and getting noticed by the IRS puts you on the watch list for future errors.

* Operating a predominantly cash business.

* Going from making lots of money to making a little money.

* Suddenly making a lot of money from an average amount of money.

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Photo: Peterhof Palace, St. Petersburg, Russia, FS, 2012.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I was audited twice when I earned less than $100K. It was before I even started my income property business. So much for statistics! I purposely do not donate to political campaigns because I do not believe politicians!

    The IRS doesn’t intimidate me, but I do not want an audit. Not because I did anything illegal, but the preparation is brutal.

  2. says

    Since I don’t make much from my online businesses, I typically don’t claim it as a business but I still claim the income on my taxes (I think as a 1099 of some fashion). I try to work some sort of job. Even then, I can imagine what would happen if I got audited-I would be terrified!

  3. Jenny @ Frugal Guru Guide says

    The IRS can audit me if they want. I’d be able to claim the Salvation Army cash donation I forgot about, and they’ll have to give me more money back. :) Also, I will make it the most expensive and time-consuming audit I possibly can.

    We gave $1000 last year to one of the charities they targeted for audit for political reasons. We’re giving that much again this year. I’m not impressed by the strong-arm tactics. I value feeding orphans in Guatemala and providing emergency relief to countries struck by disaster far more than I value keeping out of some political thug’s crosshairs.

    Truth to power. I will never be a sycophant.

    And rjack, the IRS has ADMITTED to targeting a number of charities for harassment due to their political alignment. A number of individuals who were major political donors seem to also have been targeted–goodness knows if we will ever know the truth of this. If so, this is truly new. It has never happened before since the IRS was created. This is Tammany Hall politics, and I am terribly sorry to see the country come to this state. Very sad, but not surprised–it is a classic Bill Ayers move. So was the seizure of the press’s phone records without a warrant by the DOJ simply because the AP scooped the White House even though there was NO risk to the country.

    Funny, but I have NEVER made a political contribution before. EVER. But this year will probably be the first–and you better believe it won’t be to anyone abusing power at this level.

  4. Shaun says

    I’m 99% sure they targeted “businesses” with the names tea party/etc in the title. Maybe that was politically motivated maybe it was just as much because random one person businesses making crazy deductions are already who they’re most likely to audit and in 2010 all these groups popping up at once seemed like the most likely to not pass an audit.

    Either way. Regardless of the level of corruption it was. They weren’t taking random people saying is this person republican or democrat and auditing / not auditing based on this. If you’ve got a startup you’re claiming against your chance for audit skyrockets already. Everybody knows this. I don’t see this as too big a difference from how the IRS normally operates. If a bunch of random sketchy businesses started popping up doing x or y they’d target them for audit too that’s their job. This is more a part of the hype machine with people reporting it out of context as if random people got audited based solely on political affiliation.

    • says

      It does make sense to target tax-exempt status applications who are also from the Tea Parter. To not target such groups would be illogical under the Obama admin. However, it was too obvious as liberal tax exempt status applications got easily approved.

      I’m looking forward to the IRS handling our Affordable Care. Exciting!

      • Shaun says

        Not saying it wasn’t wrong or corrupt or that we shouldn’t have people watching the IRS. Just saying steps to get audited in this case aren’t

        1) Type in W2
        2) Get audited if Republican.

        That’s skipping the BIGGEST step in this. You’d first have to create a political organization and declare tax exempt status to be discriminated against unfairly. That’s wrong for the IRS to do but it effects maybe .000000001% of the population in this case. Were talking about a minute group of individuals who got audited here.

        • says

          Targeting Republican tax exempt applicants is only the tip of the iceberg. You don’t think the IRS is targeting other groups? Of course they are. They just haven’t been caught yet.

        • Shaun says

          I think that’s a bit of a straw-man. Less than 2% of the population gets audited each year even if all those people were unfairly targeted in some way(which they’re not) it’s not a very big iceberg.

          A good percentage of the audits are to clear up typo’s or people’s confusion about what they can/can’t claim. Most of what I’ve read about people’s encounters with the IRS and my personal experience is that the IRS has been fairly understanding about how confusing some of this stuff is. What happened here is a scandal, but it’s a scandal involving a very small amount of people claiming a tax status that almost all people didn’t even know existed previous to the scandal and with the backlash the IRS is going to get from this, I wouldn’t expect this type of thing to expand any further than its gotten.

  5. says

    If you are a higher income earner (500k+) your best bet for avoiding an audit is to simply stay out of grey investments (tax-shelters, etc) and eliminate your filing mistakes. Those two things invite more audits than anything else for those with higher incomes. As you have seen for yourself Sam, two of your three audit letters were a result of your own errors.

    As for anyone being shocked at the audit percentage for high income earners, the reason is simple; there are much bigger dollars at stake for the IRS with a lower cost of effort per dollar “found” by going after these bigger fish. No sense spending $10,000 chasing a $5,000 of extra tax when they can spend the same $10,000 getting $50,000 or more.

    As for donating to politicians… not interested. I would rather keep immaculate financial records and deal with the IRS than step into an arena which is all smoke and mirrors. Of course, having been in public accounting for several years early in my career, I don’t share the same fear of the IRS as most. That being said, targeted audits are simply another step in the degradation of values in this country, but to be expected at this point. I don’t view either side as particularly innocent.

  6. says

    I find the audit rates very low for the no income and under $25K. Those are the incomes that give you access to a lot of state benefits like food stamps or medicaid, they should be audited more often to prevent abuse.

  7. says

    The audit stats by income level surprised me. I think the chance of getting audited is going to rise for everyone over time as the IRS gets it hands on more and more information. I keep seeing articles about the IRS legally being able to data mine from all reaches of the web and various digital records so who knows how much things could change in 10 years. Intriguing advice on political affiliations and audit risk. The higher ups at the IRS must have so many ways to control what they define as red flags for their automatic audits and all of the staff to act upon. I don’t donate to any political parties and currently have no plans to though. I hear ya on getting chased for more money and being put on call lists after donating even just a little. When I switched phone numbers a few years back I knew the guy who previously had my number was a democrat because every day for about two months all I got was solicitation calls for money and campaign announcements for the democratic party.

    • says

      The IRS’s reach continues to grow and get more powerful. Everybody sleep with their right eye wide open! Or, follow my three steps in this post and live FREE until the next regime change.

  8. says

    Kind of sad reality for all of us that this country was founded on the notion that every human has right to speak without worrying about the political backlash or fear. The First Amendment says that people have the right to speak freely without government interference.

    We live in a different world now. That’s why I am a big believer in the fair tax. Will it happen during my lifetime? I don’t think so.

    http://www.streetsmartfinance.org/2012/04/07/a-simple-plan-to-skyrocket-your-personal-and-national-economy/

  9. says

    I have come to the conclusion that the only way to avoid this crap is by junking the IRS all together for a consumption tax. Why should we have to worry about how we file our taxes based on who is in power? A persons political affiliation shouldn’t matter in the least in determining if one should be audited or not. The fact of the matter is the IRS has lots of leeway in collecting taxes and there isn’t much the non-rich can do about it.

  10. Grace says

    This is a funny article. I don’t know if you are being serious or satirical.

    You can align yourself with the powers that be or live amongst the shadows.

  11. says

    I thought that Republican/Democrat were split 46%/46%, and the other 8% were Independents?

    What I always laugh about is the field on the tax forms asking if you would like to donate to the Presidential/Gubernatorial campaign. I don’t get a laugh because they’re asking for donations, but the fact that they state it doesn’t affect increase or reduce your taxes.
    Funny how the IRS can create money out of thin air huh?

  12. Anton Ivanov | Dreams Cash True says

    I’m a bit skeptical about your claim that your political party affiliation has anything to do with your chance of getting audited. The red flags you listed at the end of the article all make sense, but I don’t think aligning with a particular party of donating to one charity vs the other is going to do you any good (or bad).

  13. Lulu says

    Stay neutral or aligned with those in power?
    Donate to charities that matter to those in power?
    Hm sounds familiar.
    That is exactly what most Germans did in the 30s
    if they did not want to go to jail.
    Just stay quite, do not protest, keep you and your family
    safe. First steps to a bright future America!!!
    (I am German so I know)

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