Are IRS audits really on the rise? YES!
Here are a few highlights from the IRS's audit activities
in 2007:
For the first time since 1998, the percentage of individual
tax return audits was higher than one percent. Audits of S
corporations and partnerships increased. 1 out of 11
millionaires faced an audit in 2007.
What is triggering this increase in audits?
The IRS is under great pressure from Congress to show
results in closing the $300 billion tax gap, the difference
between what taxpayers owe and what they pay. The IRS
reported that enforcement and examination revenue totaled
more than $55 billion in 2007, up from roughly $45 billion
in 2006.
Audits of Individual Tax Returns:
Audits of all individuals across all income levels
increased in 2007. The IRS reported that the total number
of individual returns audited in 2007 was 1.38 million
compared to 1.29 million in 2006.
Audits of "High Income" Individuals:
The IRS considers "high income" individuals to be those who
have "Total Positive Income" (TPI) of $100,000 or more.
Generally, TPI is calculated by using only positive income
values from specific income fields on the tax return and
treats losses as zero. This is important for those with
real estate losses!
Example:
You file a return showing wages of $80,000, interest of
$10,000, business income of $40,000, and a $35,000 loss
from rental real estate. Your net income is then $95,000.
However, your TPI is $130,000, so your return is considered
a high income tax return by the IRS.
The IRS audited 293,188 of these returns in 2007, up nearly
14 percent from 2006.
The IRS also audited more individuals with incomes above
$200,000 in 2007 than in 2006. Audits of individuals with
incomes over $200,000 reached 113,105 returns, reflecting
an increase of nearly 30 percent from 2006!
Audits of Millionaires:
Audits of individuals with incomes of $1 million or more
increased 84 percent from 2006 to 2007. More than 30,000
millionaires were audited in 2007 compared to 17,000 in
2006.
Audits of Businesses:
The IRS took special interest in two popular business
entities: S corporations and partnerships. Audits of both
entities were up in 2007 compared to 2006 by roughly 25
percent.
With the tax gap as large as it is, the IRS is likely to
keep up this new pace. Are you prepared?
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Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on such strategies, Tom is an adjunct professor in
the Masters of Tax program at Arizona State University. For
more information, please visit
http://www.provisionwealth.com
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