In an effort to lower taxpayers’ tax avoidance schemes, the IRS is increasing the amount of audits it performs and specifically targeting wealthier taxpayers.
According to the agency’s latest statistical report, the percentage of taxpayers who were audited increased in every category of adjusted gross income above $500,000, compared to last year. The biggest increase occurred at the topmost income levels. Approximately 18% of Americans earning at least $10 million were audited in 2010, up from 11% during 2009. The audit rate rose to 3.4% from 2.8% for taxpayers with adjusted gross income between $500,000 to $1 million.
Approximately 70% of the IRS’ audits of individuals are often “correspondence” exams in which a series of letters are exchanged. Issues that are being targeted include high deductions for mortgage interest, charitable gifts, and foreign offshore accounts.
In 2009, the IRS created a voluntary disclosure program for U.S. taxpayers with undeclared offshore accounts. The program allowed taxpayers to declare income voluntarily before the IRS commenced an audit. Generally, those with offshore accounts are wealthy individuals and thus, the IRS created the Global High Wealth Industry group, also known as the “wealth squad,” to undertake the audits of individuals who unreported foreign accounts.
Due to the success of the 2009 voluntary disclosure program, the IRS created another voluntary disclosure program in February allowing taxpayers to come forward with undeclared foreign accounts by August 31, 2011. The penalty terms for the second program are tougher than the first program, however, they are still less severe than if the IRS were to find out about the offshore accounts on their own.
As part of the audit of these individuals, the IRS sends the taxpayers a series of detailed questions regarding past tax returns. Complying with these requests can cost at least $10,000 in accounting fees and legal fees.
Please contact your Marcum LLP Tax Professional today to learn more about this IRS report today.