Ever wonder how the Internal Revenue Service determines the income tax returns it will audit? So do we. The Service, however, is unlikely to disclose the specific criteria that are used when it decides to pull a return for an audit. But we do know the statistics of the types of tax returns that are audited.
A recent audit of the IRS and their audit practices suggests that the agency should focus more on higher-income taxpayers. Currently, the IRS audits about 1.5 percent of taxpayers earning $200,000 to $400,000. The Tax Inspector General for Tax Administration (TIGTA) found that there is likely to be a larger return for the IRS's investment of resources by auditing more returns with $5 million or more in income.
The TIGTA noted that audits of the higher-level tax returns could generate $4,545 per hour in additional taxes, which is almost eight times greater than what the lower income returns produce.
The IRS spends a great deal of resources on the lower bracket tax returns because there are a many more returns in that category. The Service defended its practice due to the great deterrence value.
If income earners in that bracket felt there was little likelihood of an audit, the IRS believes they may be more tempted to push the envelope and reduce the voluntary compliance that is necessary for the current collection process to remain effective.
In an era of constrained budgets, the IRS is likely to take some of this advice from the TIGTA, as it attempts to show greater productivity with lower numbers of staff.
Any audit at any income level is a serious matter and you should be certain to retain the professional assistance you need to resolve the matter in an efficient manner.
Source: wsj.com, "IRS Urged to Focus Audits on Wealthiest," Richard Rubin, November 23, 2015