Don't Mess With Taxes

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Are you freaking out about the possibility that one of the new Internal Revenue Service enforcement agents will be coming for you? Most of us don't have to worry. The prime targets are the very wealthy.

Why has the IRS been instructed to go after this filing demographic?

One reason is because the richest taxpayers who try to hide taxable assets offer the biggest return when they are caught.

Another reason is that they've been flying under the IRS audit radar for way too long.

Dramatic drop in high wealth audits: A Government Accountability Office (GAO) tax compliance report (GAO-22-104960) from May specifically looked at IRS audit rates and trends, specifically in connection with taxpayers' incomes.

The government watchdog found that, "In recent years, IRS audited taxpayers with incomes below $25,000 and those with incomes of $500,000 or more at higher-than-average rates. But audit rates have dropped for all income levels — with audit rates decreasing the most for taxpayers with incomes of $200,000 or more."

Audit Rates by Total Positive Income, Tax Year 2019

While the GAO discovered that IRS audit rates decreased more for higher-income taxpayers, the agency also generally audited wealthier filers at higher rates compared to lower-income taxpayers.

The one notable exception, according to the GAO report, was the audit rate for lower-income taxpayers claiming the Earned Income Tax Credit (EITC). The IRS examined these filers' return at a higher-than-average rate. IRS officials explained that EITC audits require relatively few resources, and prevent ineligible taxpayers from receiving the EITC.

Why the audit rate dropped: Higher-income audits, on the other hand, "declined due to staffing decreases and because it takes more staff time and expertise to handle complex higher-income audits," noted the GAO.

It's the more staff time and expertise issues that the Inflation Relief Act of 2022, which cleared the House on Aug. 12, will address. The bulk of the almost $80 billion additional provided the IRS under the bill will go toward enforcement efforts, which Biden Administration and Treasury officials insist will focus on taxpayers making $400,000 or more.

The GAO report on IRS audit activities is one of this weekend's Saturday Shout Out items. Again, you can read the full report, "Trends of IRS Audit Rates and Results for Individual Taxpayers by Income," which is chock full of more graphs.

Audits for all: Of course, those of us making much, much less than the new IRS audit targets also should be aware of what still could get us added unwanted IRS attention. You can check out my (shameless self shout out) earlier post on 8 audit flags you shouldn't wave.

If, even after your best, most honest, filing efforts you somehow one day find yourself answering IRS questions, don't panic. Prepare.

First, don't go it alone. Get good tax representation. Look for a tax pro who's experienced in audits.

Also remember that unlike the U.S. legal system where you're innocent until proved guilty, Uncle Sam's tax collector presumes you're guilty. It's up to you to convince the agent, generally via your very good and thorough record keeping (and with your aforementioned legal representative's help), that all your Form 1040 claims were legit.

In case you do ever end up facing a tax audit, the following additional Saturday Shout Outs provide a bit of a primer on the process.

• What are the Key Steps in Preparing for an IRS Tax Audit? from Brager Tax Law;
• The Four Types of Tax Audits from RJS Law
• 4 Different Types of IRS Audits & Purposes from Brotman Law; and
• What Happens at the Conclusion of an Audit? from William D. Hartsock, Esq.

Regardless of your income, a tax audit is never fun. I hope you never have to learn that. But just in case, be ready!

You also might find these items of interest:

• Do you live in a tax audit hot spot?
• If IRS asks, you've got some 'splaining to do
• Tax audit odds are low, but if it happens be prepared

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