Audit risk for a simple change on a 1040-X?

[AHHHH-taxes]

I filed my 2023 taxes on time, correctly, paid all estimated taxes, and provided all required paperwork (essentially, I did everything right), but my tax preparer made a mistake and checked 'NO' instead of 'YES' for the 'Did you buy or sell any digital asset transactions?' question.

I went to amend it today with a 1040-X, and the tax preparer said their software showed the system defaulted to 'NO' because she forgot to check either option. Honestly, if all the numbers are correct, I submitted all the paperwork correctly, and I paid the estimated taxes correctly, how much of a risk am I at for being audited due to the checkbox being changed from 'NO' to 'YES'?

I heard that amended 1040-X forms go into the hands of a real person, and since I've done my best to stay low-profile and invisible to the IRS by filing my taxes correctly, will an auditor look at this and say, 'A BOX CHANGED FROM NO TO YES! AUDIT HIM NOW!'? I feel like the tax preparer who made the mistake has placed a target on my back!

[Opus 17]

No one really knows what the triggers for audits are.  (Maybe a few ex-IRS agents.)  Did you buy and sell at a loss or gain?  If you had a gain and are paying some extra tax, I don't know that would make someone decide to look for even more.   Losses are more problematic, because you can't deduct losses on digital assets held for personal use, only assets held for investment purposes.  So there could be more questions.  But if you have a paid tax preparer, they are supposed to stand with you if you are audited.  It should be part of the service. 

[pk]

@AHHHH-taxes 

(a) First the bad news ---  you are ultimately responsible for the return filed ( whether a tax preparer  or YOU prepared and transmitted the return. You are signing the  jurat  saying  that all the details are true.

(b) Just because you forgot  or mistakenly  checked the wrong box is no cause for alarm.  A  1040-X that does not change tax liability is generally not needed.  Even if you file a 1040-X to correct the declaration  that you on wed digital assets , it will not change your tax burden  and therefore probably not required.

(c) The purpose of Digital Assets question is  to put on record that you have such assets or participated in transactions with such assets --- downstream it will be a capital asset and therefore  capital gains ta may be due.  That is all it trying to do.

(d)   There are actually three  kinds of audits----  single parameter audit ( when your return was flagged  as  unusual claim on one type of deduction ;  general compliance audit  ( when every claim is audited of a randomly selected return);  and lastly parametric value audit -- this is done to  set the gate values of checks ( parameters by looking at a large number of return.  Note that most these internal audits may not result in an actual notification to you.

Audits cost a lot of manpower / $ and as such there is always a cost/benefit test to see if the cost is worth the audit.

So rest assured that as long as you follow the rules and have  back-up  documents to prove your claim, there is nothing to worry about.

That is my view ( based on my own interactions as a volunteer at US treasury, years ago ).

[AHHHH-taxes]

@pk 
Thank you. I have no problem paying the government what’s owed to them and providing all the money they require lawfully. I just feel like I have a target on my back because of a mistake made by the tax preparer.

The thing is, I understand that we are ultimately responsible for the return filed and need to review it before the tax preparer submits it. But how can WE (the average individuals who need to hire a stranger to do our taxes) be responsible for reviewing the tax forms when we don’t even know what we’re looking at? If we knew what we were doing, or knew how to interpret the forms, or understood that a box needed to be checked, we wouldn’t pay a tax preparer hundreds of dollars to do it for us.

That’s what bothers me the most: the individual filer is held responsible to ensure that a professional, college-educated tax preparer filled out all the forms correctly, even though we don’t know what we’re doing in the first place.

[Opus 17]

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@AHHHH-taxes wrote:

@pk 

That’s what bothers me the most: the individual filer is held responsible to ensure that a professional, college-educated tax preparer filled out all the forms correctly, even though we don’t know what we’re doing in the first place.

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From the IRS point of view, the taxpayer is always ultimately responsible. But when you use a professional, they have some responsibility, probably determined by your contract, and the various professional societies (like AICPA or the Bar Association) probably have professional standards as well.  

If someone does get in a situation where they are audited and owe more tax, the taxpayer is always going to pay because the taxpayer always owes their own correct tax.  But the preparer might be liable for any interest or penalties if they were caused by the preparer's mistake.