IRS Increasing Tax Audits

Filed in archive Taxes on February 1, 2008

I've never been subjected to a tax audit, and I hope I never will. But this Wall Street Journal report says my chances are increasing:

Internal Revenue Service officials say audits of taxpayers making $100,000 or more rose 14% last year from 2006. Recent IRS data also show a 29% increase in audits of people making $200,000 or more - and an 84% surge in audits of those with incomes of $1 million or more.

Overall, the number of individual income-tax audits reached a 10-year high in 2007 - and the IRS plans to increase the number of audits this year.

The article notes that self-employed people are under particular scrutiny because they don't have their income tracked in the same way that a company employee would - making it easier for them to under-report their income and harder for the IRS to check their claims against employer-generated tax forms.

But you can reduce your already-slim chances of being audited:

The IRS relies on numerous techniques to choose which returns are audited. Many returns are selected on the basis of a secret computerized-scoring system that the IRS recently has updated, which is based on a continuing research project involving in-depth audits of thousands of returns. Computer programs assign each tax return a score that evaluates the potential for inaccuracies, based on the IRS's experience with similar returns. IRS staffers then pore through those returns with the highest scores to see which would make the best targets.

Many returns are picked because of "mismatches" - which means that something a taxpayer reported doesn't match what was reported separately to the IRS by employers, banks or other financial institutions. Thus, one way to reduce your chances of hearing from the IRS is to double-check your return to see if what you reported matches what appears on those forms.

My vision of an IRS audit has always been a sweaty, cranky IRS agent with a too-small suit coming to your home or place of business and demanding you pull out every receipt for every transaction over the past 10 years. But, in truth, the "field audit" is not very common:

Most IRS probes are conducted by mail and are known as "correspondence" audits. These focus on a limited number of specific issues on a return and are designed to address those topics that don't require a full-scale, face-to-face audit. More complex issues are handled through what are known as "field" audits and are conducted in person. These may involve a trip to an IRS office or to the taxpayer's home or business.

In fiscal 2007, just over one million of the 1,384,563 individual income-tax audits were correspondence audits. Of the 31,382 audits of people with income of $1 million and higher, 19,123 were correspondence audits and 12,259 were field audits.

Keep your nose clean and you should be OK.