Alabama Tax Audit Targets

Will you be audited? Taxpayers are often concerned that they might be audited by the IRS or their home state. The Alabama Department of Revenue is very effective at targeting income tax returns for audit. Department of Revenue agents search social media and websites. Businesses are almost always on the internet. Agents can easily check as to whether businesses on the web have filed tax returns. Has the business filed income tax returns, sales tax returns and other returns? It’s a simple task for the agent and an audit letter follows.

Individual returns are screened through a system that flags returns that have overpayments of tax for refund or application to the succeeding years’ returns. Likely, the returns requesting a refund garner more attention. When the overpayments (refunds) are generated by losses from a business, for example a Schedule C, the taxpayer can expect a letter from the Department. The letter will likely contain a request for substantiation of all deductions and possibly bank statements and other information. If the overpayment is generated by significant Schedule A deductions, for example, charitable contributions, medical expenses, etc. then the taxpayer should also expect a letter from the Alabama Department of Revenue.

The Alabama Department of Revenue seems to have recognized that taxpayers with jobs as W-2 employees will pay taxes throughout the year through payroll withholdings. Some of these taxpayers will file tax returns with self-employed business losses on a Schedule C that generate losses resulting in tax overpayments. A percentage of these taxpayers will have either exaggerated or fabricated their business losses. Again, some W-2 employee taxpayers will exaggerate their Schedule A deductions, in order to generate overpayments. Of course, the size of the losses and the resulting overpayment (refund) will impact the audit risk.

Alabama has stepped up their game in recent years and is quite proficient at targeting returns for audit. Taxpayers should bear this in mind when filing their returns and preparers should let their clients know of the audit risk.

When I graduated from law school and began working for companies being audited by the IRS and state tax agencies, my mentor, an attorney from New Jersey, passed on these words of wisdom “Pigs get fed and hogs get slaughtered.” It applies across a broad spectrum of life.

Gene M. Bowman, Attorney & CPA

Huntsville, Alabama