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High earners face surge in tax audits

  Tax  -   POSTED: 2008/02/21 15:59

The IRS is turning up the heat on high-income taxpayers, especially those who work for themselves. Internal Revenue Service officials say audits of taxpayers making $100,000 or more rose 14 percent last year from 2006. Recent IRS data also show a 29 percent increase in audits of people making $200,000 or more – and an 84 percent 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 that number this year.

The push comes as the agency faces heavy pressure from Congress to raise additional revenue and shrink the nation's $290 billion "tax gap," the difference between what's collected and what should be collected.

IRS research indicates that much of the tax noncompliance is committed by self-employed workers, such as consultants and small-business owners, whose taxes aren't withheld from their pay and whose income isn't reported separately.

This year, "we will continue to focus on audits of high-income individuals," said Linda Stiff, the IRS's acting commissioner.

In addition, agents have increased audits of taxpayers involved in partnerships and businesses organized as "S corporations."

For the vast majority of taxpayers, the odds of getting audited remain low. Only about 1 percent of all individual returns filed in recent years have been audited. But the chances now are higher than just a few years ago.

The IRS relies on numerous techniques to choose which returns to audit. Many are selected using a secret computerized-scoring system that the IRS recently 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.

Others are picked because of "mismatches" – which means that something a taxpayer reported doesn't match what was reported separately to the IRS by employers or financial institutions.

Some returns get audited because they were done by a tax preparer the IRS suspects of wrongdoing.

Then there are those that get selected because of a tip from confidential informants, such as a former business partner or ex-spouse.


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