Sometimes the IRS Will Audit You for Not Making Enough Money

The other day, I read a story that was almost too crazy to believe. The IRS audited someone because they just couldn't believe that a hard working family can live in a high cost city while earning less than poverty level wages.

A December 6, 2009 story in the Seattle Times tells the story of a how the 2009 tax return of hard working single mother of two who got audited because the IRS believed that it was not possible for her family to get by in Seattle with her income alone and thought she may have unreported income. The story describes how the IRS had their own charts that showed a family needed about $36,000 a year to get by.

The story gets more bizarre. Her 2006 and 2007 returns were found deficient for the same reasons, and she was slapped with a $16,000 tax bill. Read the full story for the gory details, but the bottom line was that the IRS was interpreting the law incorrectly, but it took $10,000 of her money and her parents money to get the IRS to figure that out.

Poverty in Seattle
Seattle is not a cheap city to live in. An average looking three bedroom house in a bad neighborhood can easily be worth $300,000. In spite of the higher than average prices, about 10% of the people in Seattle live in families that make less than poverty level income. The US government, specifically the department of Health and Human Services, says that for most of the US, the poverty level in 2009 for a family of three is $18,310. While the woman in the story was slightly above this level, she earned enough money to take care of her kids, but did so by in part by living in one of her parent's houses and getting by without a car.

Lessons Learned
What can you take away from a story like this? One lesson is that sometimes the IRS gets it wrong, and if they get it wrong for your return, it may take a lot of money and time to figure it out. Another is that you don't have to have a high income or great wealth to get audited. If the IRS wants to come after you, there isn't much you can do. The best thing you can do is to be prepared by filling out your tax returns to the best of your ability, and to keep any paperwork or receipts that you think you may need.