Red flags that tempt the tax auditor

Taxes » Tax Law » Red Flags That Tempt The Tax Auditor

It is the most dreaded letter a taxpayer can receive.

Dear Taxpayer,
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 were audited. By 2003, it was even easier for tax scofflaws; that year, according to IRS data, only 1 in 150 individual taxpayers were audited.

Focus on richer taxpayers

The number of audits nowadays remains low. In fiscal year 2013, the IRS audited 1.4 million people. That's 1 percent of returns filed for tax year 2012 and the fewest number of audits in more than five years.

Even better news is that most of us aren't the target of IRS examiners. The tax collector has been focusing on the rich.

If you made less than $200,000, your chance of being audited was just 0.88 percent. That's down from the 0.94 percent audit rate in fiscal year 2012.

Your audit odds increased if your income was between $200,000 and $1 million. In fiscal year 2013, just 3.26 percent of returns filed by individuals in that income range were audited.

And if you made more than $1 million, almost 11 percent of returns got closer looks from IRS auditors.

Still, all those 2013 audit rates were down from the prior fiscal year.

The lower level of return examinations, however, is not just out of the goodness of Uncle Sam's heart.

General budget cuts forced the IRS to pull back on some of its audit operations. This filing season, IRS Commissioner John Koskinen says that budget cuts will mean fewer audits. While that might sound good to taxpayers who push the filing envelope, Koskinen says the estimated 326,000 fewer individual and business examinations will cost the U.S. Treasury at least $2 billion in revenue that otherwise would have been collected in fiscal year 2015.


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