IRS audits, mostly of rich, surge

IRS by the numbers

Source: Internal Revenue Service

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The number of taxpayers saddled with an Internal Revenue Service audit has been growing gradually during the last decade and is almost double audits conducted in 2001.

The IRS audited 1.6 million individual returns in 2011 out of 141 million, or just over 1 percent. In 2001, only 0.6 percent of taxpayers were audited.

During the same period, the department boosted its key enforcement staff — revenue officers, agents and special agents — from 20,203 to 22,184.

The added enforcement resulted in collections of $55.2 billion, a 28 percent increase over 2001, according to IRS data released earlier this month.

“The IRS believes the more audits they do, the more they collect and the numbers back them up,” said Wayne Essex, owner of Essex and Associates, a tax and accounting firm.

More than eight in 10 of the taxpayers audited in 2010, the most recent data available, had to pay additional taxes. Last year, the IRS garnished wages or seized money from bank accounts 3.7 million times, put liens on 1 million properties and seized 776 properties.

Essex said the rising numbers aren’t reason for most people to panic. “The numbers across the board have increased, but the vast majority of people at the lower income level, seldom get audited,” he said.

If you make more than $1 million annually, the odds have been rising that you’ll be hearing from the IRS. IRS figures show 12 percent of millionaire earners were audited last year. That’s up from 8 percent in 2010 and 6 percent in 2009. For the under $200,000 earners, the rate has stayed steady in recent years at around 1 percent.

“Now, most people who hear the letters I-R-S think enforcement. But, in reality, the majority of Americans file a tax return electronically and receive on average a $3,000 refund and don’t hear from us again,” said IRS Commissioner Doug Shulman, during a recent address at the Harvard Kennedy School.

IRS officials have said the growing audit rate for high earners is aimed at demonstrating that the tax code is being enforced fairly.

Steven Miller, deputy IRS commissioner for services and enforcement, has said the higher audit rates for the highest earning individuals are designed to “assure that those at the lower end of the spectrum know that those at the higher end of the spectrum are subject to the same rules and enforcement as everyone else.”

Shulman said he wants to move the agency away from the traditional “look-back” model of compliance audits.

“... let me cast an eye toward the future and a potential new structure that would fundamentally change the way taxpayers and tax practitioners prepare and file individual returns ... and one that leverages technological innovations,” Shulman said. “We’re moving away from the after-the-fact, or “look-back” model — where we chased after taxpayers who had to hunt for, or re-create records and documentation — to one where we’re reducing burden.”

More returns are accurate, than not

Under the vision of a real-time tax system, the IRS could embed third-party information into its pre-screening filters, and provide the opportunity for taxpayers to fix a return, if it contains data that does not match government records.

“This is a tectonic shift,” Shulman said. “We would have more accurate returns and deal with many more problems up-front. We could shift resources to spend more money getting it right in the first place, and do less back-end auditing.”

Taxpayers have two additional days to file their federal returns this year. The deadline is April 17.

Essex said the IRS accepts most federal tax returns as filed. There are red flags, however, that can trigger an audit, including bad math, illegible handwriting, expenses out of line with income, and unreported income.

“The IRS is slow, but they do eventually catch up with you,” he said.

Selecting a tax return to be audited doesn’t always suggest that an error has been made, according to the IRS. Returns are selected using a variety of methods, including:

Some audits are handled by mail, others require a face-to-face field examination. Essex said in most cases, it’s a matter of providing a source document.

“It can be fairly painless if you have the documents,” Essex said. “Any tax professional will tell you to run toward the IRS, not away from them if you are notified of an audit.”

To avoid an audit, Jennifer Jenkins, a spokeswoman for the IRS, advises that if taypayers want to hire a tax preparation service, make sure it is a reputable one that is up-to-date on the law. If an earner opts to do their own tax return, she suggests using the agency’s e-file software that alerts the preparer to potential errors before the return is sent down range to the IRS.

“The best advice is simple: File complete, accurate returns, do not under-report or simply fail to report income, claim those tax breaks that you are entitled to but only those, and keep good records that substantiate your income, credits and deductions,” Jenkins said.

The Associated Press contributed to this report.