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Tax-audit risk rises with your income

Your chances of being audited are pretty good if you’re wealthy. They’re not bad if you’re not.
/ Source: The Associated Press

Your chances of being audited are pretty good if you’re wealthy. They’re not bad if you’re not.

About 1 in 16 taxpayers with income of $1 million and higher was audited last year, a 33 percent increase from the previous year.

“If you’re earning that kind of money and we notice a problem, you’re going to hear from us,” IRS Commissioner Mark W. Everson said in a statement on the agency’s enforcement figures for the 2006 fiscal year.

But it’s not just those in the financial stratosphere who face increased IRS scrutiny.

Audits of taxpayers with incomes above $100,000 were up 18 percent from 2005, the highest figure in more than a decade. Audits of certain businesses, especially “S” corporations and partnerships, increased by 34 percent, though audits of larger corporations — with assets over $10 million — were down slightly.

Overall, audits of individual taxpayers were up by 6 percent in 2006; total individual returns audited were 1.3 million, for an average individual audit risk of about 1 in 100.

Not every audit means a “field” audit, a face-to-face meeting with an IRS agent. Some are correspondence audits — essentially a letter from the IRS to clear up discrepancies or apparent inaccuracies.

More serious tax issues involve underreporting income and overstating deductions, exemptions and credits. For that reason, a tax return with a large number of deductions may be flagged for audit.

Celebrities have also been known to attract the IRS’ attention: Late last year, actor Wesley Snipes pleaded innocent to federal charges that he failed to file tax returns and that he falsely claimed millions of dollars in refunds.

Taxpayers have the right to appeal IRS findings and, if the dispute can’t be settled, to take their case to the Taxpayer Advocate Service, which is part of the IRS but operates independently and will help taxpayers resolve problems.

The IRS can also work out payment plans for those who owe unpaid taxes, interest or penalties.

Congress set three years as the deadline, or statute of limitations, during which the IRS can go back and make additional tax assessments. But that time can be extended if the IRS suspects serious underreporting of income. There is no statute of limitations for failure to file a return or when tax fraud is suspected.

If the case reaches actual prosecution, there is this sobering fact: The IRS reports it had a conviction rate last year of 91.5 percent.