Of the tools the Internal Revenue Service (IRS) possesses, few can be more troubling to taxpayers than that of an audit. There is both the element of digging back through past years records that is always a bother, and the fear, even if you believe your income tax filings are scrupulously accurate, that there is a mistake or error.
While the IRS is auditing fewer and fewer returns every year, they are becoming more selective. With budget cuts, hiring freezes and issues like the sequestration, the IRS has had difficulty maintaining adequate staffing and training levels. As a consequence, taxpayers with incomes below $200,000 are less likely than ever to receive a tax audit notice.
Above $200,000, the rate increases to a little over three percent, but above $1 million, it more than triples to almost 11 percent. This is because the Service believes that these taxpayers have the assets necessary to pay the disputed tax amount and they are likely to receive a greater return on their investment of staff resources and time.
Taxpayers with significant incomes and complex and sophisticated transactions may also be perceived as more likely to have the incentive and ability to manipulate their profit and loss to negate the tax impact.
If you receive a notice of an audit, or a request for an interview by senior agents, you should immediately contact your tax professionals, especially your tax attorney. While a tax audit could produce a result that requires you pay additional taxes, as well as penalties and interest, misstatements to IRS agents could produce far worse.
Speaking with agents without your tax professional present leaves you at risk of making an inadvertent statement that could be viewed by the IRS as lying to a federal agent. At that point, your audit could lead to criminal felony charges.
Source: Source: "Tax audits down overall; wealthier taxpayers face highest risk," accessed from Kundra & Associates on June 4, 2014