48.1 Odds of Being Audited

The odds are low that your return will be picked for an audit. However, the number has been increasing, particularly with respect to high-income taxpayers.

Audit odds vary depending on your income, profession, type of return, type of transactions reported, and where you live. Individual returns are classified by all income items on the return without regard to losses. Professional or business income reported on Schedule C and farm income reported on Schedule F is classified by total gross receipts, and corporate returns are classified by total assets.

Caution

IRS Increasing Audits

In recent years, the IRS has increased audits of high-income taxpayers, Schedule C filers, S corporations, partnerships, corporations, and abusive tax shelters.

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Your return may command special IRS scrutiny because of your profession, the type of transactions reported, or the deductions claimed. The chances of being audited are greater under the following circumstances:

• Your information reported on the tax return does not match information received from third-party documentation, such as Forms 1099 and W-2.
• Your itemized deductions exceed IRS targets.
• You claim tax-shelter losses.
• You report complex investment or business transactions without clear explanations.
• You receive cash payments in your work that the IRS thinks are easy to conceal, such as cash fees received by doctors or tips received by cab drivers and waiters.
• Business expenses are large in relation to income.
• Cash contributions to charity are large in relation to income.
• You are a shareholder of a closely held corporation whose return has been examined.
• A prior audit resulted in a tax deficiency.
• An informer gives the IRS grounds to believe that you are omitting income from your return.

Itemized deductions.

If your itemized deductions exceed target ranges set by the IRS, the chances of being audited increase. The IRS does not publicize its audit criteria for excessive deductions, but it does release statistics showing the average amount of deductions claimed according to reported income. Here are IRS figures based on deductions claimed on 2010 returns filed through September 2011.

Table 48-1 Average Itemized Deductions for 210

Taxpayer Bill of Rights.

The “Taxpayer Bill of Rights” collectively refers to a series of laws that aim to protect taxpayers from mistreatment by IRS personnel and insure that they are treated fairly, professionally, promptly, and courteously by the IRS and its employees. However, Congress has not enacted major taxpayer rights legislation since 1998, and many taxpayers do not know they have rights when dealing with the IRS or what those rights are. The National Taxpayer Advocate suggested in her 2011 annual report to Congress that a new Taxpayer Bill of Rights should be codified to detail the rights and also the responsibilities of taxpayers.

If you have a dispute with the IRS, you should ask for an explanation of the procedural rules affecting your case, if these are not already included in the documents sent to you. For example, before the IRS may enforce a tax lien by seizing property by levy, the IRS must provide you with a notice of your right to a hearing before an appeals officer, an explanation of the levy procedures, the availability of administrative appeals and the appeals procedures, the alternatives to the proposed levy such as an installment agreement, and the rules for obtaining the release of a lien. See IRS Publication 1, Your Rights as a Taxpayer, IRS Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund; IRS Publication 594, The IRS Collection Process; and IRS Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don’t Agree.

Taxpayer Advocate.

The Taxpayer Advocate Service (TAS) is an independent office within the IRS. The function of the TAS is to assist taxpayers in resolving problems with the IRS, propose changes in administrative practices of the IRS, and identify potential legislative changes that may mitigate problems and improve the tax system.

You may be able to receive TAS assistance if you have unsuccessfully tried to resolve your problem with the IRS and have not had your calls or letters returned. However, because of the demand on its resources, the TAS is most likely to provide assisatance if you face a significant hardship because of an impending IRS action or lack of IRS response to your problem. If you qualify, you will be assigned a personal advocate to try to resolve your problem. Contact the TAS at its homepage at www.irs.gov/advocate. From the website, you can access a state-by-state list of addresses and phone numbers for TAS offices. The list is also in IRS Publication 1546. You can contact the TAS by calling 1-877-777-4778, or you may apply for assistance by filing Form 911 (Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order)).