Red flags that tempt the tax auditor
It is the most dreaded letter a taxpayer can receive.
Some of the information that you provided to us does not agree with the information we received from other sources.
-- The Internal Revenue Service
You've just joined an elite club, one whose initiation ritual is an IRS audit. Unfortunately, you can't refuse membership -- and the dues could be astronomical.
When the IRS Restructuring and Reform Act was enacted in 1998, lawmakers ordered the agency to focus more on taxpayer rights instead of collection activities. Not surprisingly, the number of audits -- or examinations, as the agency prefers to call them -- dropped dramatically.
The first year of the kinder, gentler IRS, about 1 in 79 tax returns was audited. By 2003, it was even easier for tax scofflaws; that year, according to IRS data, only 1 in 150 individual taxpayers was audited.
But the tax times, they are a-changing.
More audit attention
During the recent recession to pay their bills, the IRS implemented programs designed to take into consideration the financial struggles that many taxpayers encountered.
But balance doesn't mean taxpayers are off the hook. Facing pressure from a Congress dealing with a growing federal deficit, the IRS has made it clear it takes the enforcement portion of its job seriously.
Still, the IRS examined about 1 percent of all individual income tax returns during fiscal year 2012, according to the agency's 2012 annual data book (the latest edition available). Of that number, says the IRS, individual income tax returns reporting higher adjusted gross incomes were more likely to be examined.
But the rich aren't the only targets. Recent tax law changes, particularly when it comes to confusing tax breaks such as the first-time homebuyer credit, always prompt closer looks at returns. And if you're a small-business person, either as a partnership or a Schedule C filer reporting self-employment income on your personal tax return, make sure you take extra care with your returns.
And those with lower incomes that make them eligible for the complicated earned income tax credit, or EITC, also face added scrutiny. The IRS' latest data show that it audited 2.1 percent of returns by filers reporting less than $25,000 in income and who claimed this tax credit.