Number of Internal Revenue Service Audits Have Increased

The Internal Revenue Service (IRS) has been increasing tax examinations  for the wealthier tax payers and is becoming more aggressive.  This is based on internal pressure to collect more because revenue has decreased.

In 2011 to catch under reporting of income, IRS agents are now reviewing credit card statements and cross-checking data against tax returns. They are trying to catch those who spend a lot but report low income.  They are using audits on taxpayers that may generate smaller amounts such as $500, as an example to others in that group as taxpayers often share their experiences with friends and co-workers.

The overall audit rate is very low, 1.11% in 2010 compared to 1% in 2009. Those operating their own business had a rate of 4%. It is estimated that this group under reports their income by $68 billion a year. The higher the income is, the higher the audit rate.  Here is a summary of percentage audited in each of the following income groups in 2010:

Income over $200,000 – 3.1% audited

Income over $1 million – 8.1% audited

Income over $10 million — 18% audited (up from 10% in 2009)

Other areas with the most fraudulent claims the IRS is targeting are refundable tax credits, over-reporting deductions and offshore accounts.  The newest areas of focus are home loan interest deductions, adoption tax credit, property gifts and large charitable deductions.

Home loan Interest

Home loan interest deductions are being reviewed because people have been borrowing more on their homes for education.  The maximum interest deduction is $1million on mortgages and up to $100,000 on home equity loans.

Adoption tax credit

The adoption tax credit maximum was increased to $13,170 in 2010 and is refundable even if you don’t owe taxes.  IRS is requiring proof from everyone on this deduction.

Property gifts

Property gifts are becoming more popular by the wealthy now that property values have decreased so much. You must file with the IRS for gifts over $13,000 and the lifetime maximum is $1 million. The IRS is reviewing state property transfer records to find taxpayers who haven’t disclosed real estate gifts.

Large charitable donations

Large charitable donations are being compared to income to determine if taxpayers are claiming more than they can afford. This can be particularly true for retired taxpayers.

The Internal Revenue Service has asked the government for more money in 2012, which is $13.3 billion compared to $12.1 billion in 2011. Does this mean they will be conducting more audits?  If they don’t get the money, will  they scale back?  Since IRS revenues are down, they are more creative in their audits and are conducting more research.  It is best to be careful on what you claim for deductions on your return.  I always tell people to error on the safe side.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Civil Penalty, Debt, Financial, Internal Revenue Service, Money & Identity

This post was written by John Ulzheimer