According to the IRS’ recently released statistics, the percentage of taxpayers who were audited in 2010 increased in every category of AGI above $500,000 compared to a year earlier. The most dramatic increase came in the $10M income bracket, of which 18% of individual earners of $10M or more suffered through audits in 2010 compared to only 11% in 2009. For individuals earning between $500,000 and $1M, audits increased from 2.8% to 3.4%.
While the total number of audits skyrocketed in recent years, at least 70% of all individual examinations by the IRS are conducted through correspondence rather than an agent. Some audits, however, involve detailed scrutiny and can run some taxpayers upwards of tens of thousands of dollars in CPA and legal defense fees.
The increase in affluent audits could be a result of IRS Commissioner Doug Shulman’s “wealth squad”, formally known as the IRS’ Global High Wealth Industry group, created in 2009. Coupled with the formation of the wealth squad was an IRS announcement providing limited amnesty for taxpayers with hidden offshore accounts.
How can you head off a possible audit? Consider over-disclosure. Speak with your CPA about providing more than the minimum-required information when disclosing a potentially audit-triggering transaction.
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