Audits up for the Affluent

In 2011 we saw more audits for successful Americans

On March 14^th, the Internal Revenue Service released the 2010 IRS Data Book. Confirming the anecdotes we’re hearing from clients, the Book reported a number of interesting, and concerning statistics.

• IRS audits are up nearly 8% for the wealthiest 2% of Americans.
• The IRS audited 18.4% of 2010 tax returns filed by taxpayers with adjusted gross incomes above $10 million. That’s up from just 10.6% for 2009.
• Taxpayers with AGI between $5 million and $10 million were also targets. Audits increased by 55% for this group in 2010 (the percentage of audited returns jumped from 7.5% to 11.6%).
• What’s going on here? The IRS has ramped up its efforts to investigate offshore bank accounts and tax shelters – and it appears to acting on its newfound knowledge. It inaugurated a Global High Wealth Industry Group in 2010 to “centralize and focus IRS compliance expertise involving high net worth individuals.”
• As IRS Commissioner Doug Shulman stated at a meeting of the New York State Bar Association Taxation Section, “We’re looking for and finding points of leverage – what some call ‘nodes’ of activity – where multiple people not paying taxes can be detected. Financial institutions are one such potential node of activity. Promoters of evasion schemes are another.”
• Now the IRS has started an Offshore Voluntary Disclosure Initiative, providing information in eight different languages to reach taxpayers and preparers who are non-native English speakers. By coming forward about undisclosed offshore accounts, they stand a chance of avoiding criminal prosecution.
• Audit rates increased across the board last year. The overall IRS audit rate was 1.11% in 2010, up from 1.00% in 2009. The taxpayers least likely to face an audit were within the $75,000-$100,000 AGI range (just 0.64% of their returns were audited).

Tax compliance is important and IRS rules, supported by legislation and Administration policy directives give auditors wide latitude. Remember the key rules: document all expenses relatable to your business, report every bit of income, review all deductions with your tax advisor, and work with a really good tax preparer.

If we can be of any assistance in keeping you out of the auditors’ office, please let us know!