IRS Audits 18.4% of the Richest Taxpayers

Last year, the Internal Revenue Service audited 18.4% of taxpayers with incomes exceeding $10 million. Audit rates went up across the board for 2010, except for those without any adjusted gross income.

Bloomberg reports:

Audit rates increased in 2010 for all income groups, except for people with no adjusted gross income, according to data released today in Washington for the fiscal year that ended Sept. 30.

Highest earners had the sharpest increases in audit rates. The IRS audited 11.6 percent of taxpayers reporting adjusted gross income between $5 million and $10 million, up from 7.5 percent the year before. Taxpayers making between $75,000 and $100,000 faced the least chance of an audit, with a 0.64 percent rate.

Through its voluntary offshore disclosure programs and court cases involving Swiss banks, the IRS has gotten a better understanding of how wealthy people in non-corporate businesses manage their assets, said George Clarke, an attorney at Miller & Chevalier Chartered in Washington.

“They learn things and then they roll those things out across the board,” he said.

The overall audit rate for income tax returns was 1.11 percent, up from 1 percent the year before. The IRS had previously reported some of this data without the breakdowns at the top of the income scale.

Concerted Effort

The increase in audits of people making more than $10 million is part of a concerted IRS effort to focus on the business dealings of the wealthiest individuals.

Read more here

IRS Audits Jump by 11 Percent; Wealthiest Targeted

The IRS increased the number of tax returns examinations by around 11% this past year. The agency released statistics yesterday showing that wealthy taxpayers are among those most likely to be targeted for an audit.

According to the Associated Press, the IRS examined more than 1.58 million individual returns in the budget year that ended in September, up from 1.43 million the year before. Of course, for most people the odds of being audited are still hovering around 1 percent.

The IRS collected $57.6 billion through enforcement actions, an 18 percent increase from the previous year.

Overall, a little more than 1 percent of returns were audited, either by mail or in person. More than 8 percent of the returns with incomes above $1 million were audited.

Read more at Google News

Prisoners cashed in on homebuyer tax credit

During many of my tax season interviews, I warned taxpayers claiming the first-time homebuyer credit to beware of IRS audits—even back then it was common knowledge that the IRS would be paying extra close attention to every tax return claiming the first-time home buyer credit. Of the fraudulent tax credit request found by the IRS were made by state and federal prisoners—and the numbers are astounding!

According to a Treasury Department report released Wednesday reported by CNNMoney.com, the inmates defrauded the government of $9.1 million in tax credits reserved for first-time homebuyers.

4,608 state and federal inmates tried to file for the first-time home buyer tax credit. 1,295 of them actually received the fraudulent refunds. 241 of those inmates were serving life sentences!
The Treasury’s inspector general also found that thousands of people filed multiple claims or made claims outside the allotted time period. In all, more than $28 million was given out improperly.

The problem was particularly bad in Florida: 61% of the “lifers” who received credits were incarcerated in the Sunshine State.

"It is possible for an inmate to buy a house while in prison," said Jo Ellyn Rackleff, spokeswoman for the Florida Department of Corrections. "…Many of the inmates have families with children who live outside." She said that one of the reasons why Florida inmates feature prominently in the Treasury report is because the Florida prison system is transparent in providing inmate information to the IRS.

However, it wasn’t just prisoners filing faulty homebuyer credit claims, the report found that the IRS awarded $17.6 million to 2,555 filers who had bought their homes before the credit program kicked in. The inspector general also identified 206 filers who claimed the credit for multiple addresses; these fraudulent filers were awarded a total of $1.4 million.

The report also found that improper filers included 34 employees of the IRS! This is in addition to 53 IRS employees that the inspector general identified last year as improper filers.
More according to CNNMoney: the report included a response from the IRS, which highlighted the huge scope of the program, with $12.6 billion in claims awarded to 1.8 million participants. The IRS said it had ramped up efforts to crack down on criminal activity and would continue to review claims and "recapture" pay-outs determined to be fraudulent.

The IRS claims to be working on finding the identities of the agency employees who are at fault for questionable or fraudulent claims.

Read the full article here:

IRS Finds Possible Problems with How Colleges Report Business Income and Set Salaries

While many colleges might be tax-exempt on reported college enterprises such as facility rentals, bookstores, and food services, colleges are still supposed to report their profits and losses to the IRS on these services. Yet many small colleges, the IRS is finding out, have never even filed the appropriate tax forms for such activities. The IRS sent a 42-page survey to 400 private and public colleges in late 2008 asking the institutions to disclose financial details about their business ventures and executive compensation. The IRS began auditing 30 institutions of higher learning based on their responses, as well as thirteen that did not respond to the survey. The article in The Chronicle of Philanthropy website reads that the IRS is concerned with unreported business activities and questions the compensation of the most valuable university employees such as presidents and chancellors. Private colleges are supposed to follow IRS guidelines on compensation. The IRS also found that most of the institutions surveyed also are not seeking out expert advice to determine whether to report those activities.

Read the full article here.

Preserve Your Organization's Tax-Exempt Status with IRS

Does the IRS recognize your organization to be a non-profit or have tax-exempt status? The IRS has announced a critical deadline for many tax-exempt organizations. If you want to preserve your organization’s tax-exempt status, you will need to file Form 990 by May 17th or risk the revocation of your federal tax-exempt status. Usually the deadline for filing this form is May 15th, if using the calendar year or the 15th day of the fifth month after an organization’s fiscal year ends. Since May 15th falls on a Saturday this year, Monday, May 17th is this year’s deadline.

Small tax-exempt organizations with annual receipts of $25,000 or less can file an electronic notice Form 990-N (e-Postcard). Tax-exempt organizations with annual receipts above $25,000 must file a Form 990 or 990-EZ, depending on annual receipts. Any private foundations file form 990-PF.

Since 2007, The Pension Protection Act of 2006 mandates that all non-profit organizations (other than churches and other church related organizations) must file this form with the IRS. If your organization does not file for three consecutive years it will automatically lose its federal tax-exempt status. Don’t let that happen, because otherwise, you may be taxed on any income received between the revocation date and your renewed exemption. You will have to reapply with the IRS to regain tax-exempt status.

IRS Spending More Time Auditing Small Businesses

Syracuse University's Transactional Records Access Clearinghouse (TRAC) highlights an upsetting fact in a new report. As if April 15 isn’t stressful enough for small-business owners, over the last five years, the Internal Revenue Service has increased the hours it spends auditing small businesses with less than $10 million in assets, by 30%, while in the mean time reducing the time it spends auditing large corporations with $250 million or more in assets by 33%. During the same period, audit hours devoted to mid-size corporations ($10 million to $250 million in assets) grew by 13%.

The author of this article on Forbes.com, Dean Zerbe, says he has “just scratched the surface of this insightful report, which should be available to the general public Monday morning, [April 19th, 2010] at TRACs website."

Read Dean Zerbe’s full article about this audit increase here: IRS Audits Small Biz More, Big Guys Less Forbes.com.

Surviving an IRS Audit with Minimal Losses

There is nothing more frightening to a taxpayer than checking your mail and seeing a letter from the IRS letting you know that you are being audited. Fortunately, if you follow a few basic tips, you will find that an audit does not need to be as scary as you might think.

1. Always be Prepared

The best way to survive an IRS audit is to always be prepared for one. You never know when the IRS is going to send you a letter informing you of an audit, so it is a good idea to always file an honest tax return. Gather and retain receipts of all claimed expenses and deductions. And hold onto all of your tax records and important financial documents for at least 6 years.

2. Do not Ignore the Problem

When you get an audit letter from the IRS, it is important that you do not just ignore the problem. You will generally have 30 days to respond to the letter, otherwise the IRS can take drastic actions such as adjusting your total tax liability. If they find you owe them more money, then the IRS will send you a notice regarding the back taxes owed and will begin collection activity.

3. Organize Documents in Advance

The IRS’s letter should include a list of items they would like to see such as canceled checks, receipts, bank statements, etc. Before the actual audit, you should go through the list and collect documentation of everything the IRS is requesting.

4. Get any Documentation you Might be Missing

If you find out that you are missing an important document the IRS auditor wants to see, then it is a good idea to get extra copies ahead of time. You can contact your bank and credit card company to get copies of statements or receipts. It is important to bring all of the documentation that has been requested when you show up for the audit. If you do not, then odds are you will see your tax liability increase.

5. Bring Only what is Required

You should only bring documents to your audit that the IRS has asked for. If the IRS did not ask you to verify your home office or a business expense, then that means you do not need to worry about it. There is no need to overwhelm the auditor with unrelated receipts or documents, as this could only lead to additional questions.

6. Make Copies, and Keep the Originals

Before the audit, you should stop by an office store or Kinko’s and make copies of all of your documentation to give to the auditor. You should make absolutely sure that you keep all of the original copies in your file cabinet in case you ever need them again in the future.

7. Be Nice & Friendly

During the audit, you want to make sure that you are nice and friendly to the auditor. No one likes paying taxes and everyone hates being audited. However, being rude to the IRS representative will do nothing positive for your case.

8. Admit your Mistakes

Everyone makes mistakes and tax returns are no exception. It is always hard to admit a mistake, but when you are faced with evidence from the IRS auditor, it is in your best interest to acknowledge the error as opposed to arguing with the representative.

9. Get Help if Needed

If you are worried about facing the IRS on your own, or feel like your finances are over your head, then you might want to enlist help from a CPA or qualified tax professional. Just make sure that you find someone who is experienced in dealing with IRS audits.

10. Know your Rights

Although an IRS audit can be very intimidating, you should not let the auditor walk all over you. Taxpayers have a specific set of rights when it comes to audits, such as the right to decide when and where it will tax place. For a full list of your audit rights checkout this page on IRS.gov.

Reducing your Chances of an IRS Audit

Over the holiday weekend, my YouTube team shot another new episode for our YouTube tax tips video series. In this episode, host Edward Lester explains a few ways to reduce your chances of an IRS audit. You can watch the embedded video below but be check out my YouTube channel to subscribe to my videos.

How to Survive an IRS Audit

On Monday the Roni Deutch Tax Center – Tax Help Blog posted a very helpful article on how to survive and IRS audit. Over the past 18 years I have heard so many horror stories about audits, and most of this panic is entirely unnecessary. If you stay organized, and were honest on your tax return, then you will most likely not have anything to worry about. However, to help any one preparing for an audit, check out the following list of tips.

Always Be Prepared

Technically, every single taxpayer is eligible for a tax audit. While some audits are selected because the taxpayer’s return flagged the system, many are conducted entirely randomly. This means that as a taxpayer you should be prepared for the possibility of an audit at all times. You should make sure to you keep all financial documents, W-2’s, receipts, etc., in one safe place. That way if you are audited, you can easily find everything you will need to verify your income and deductions. Although there is no way to fully avoid being audited, you can follow some of these tips while preparing your next return to try to reduce the odds.

Read and Respond to Notices

Generally, when the IRS notifies you of an audit you must respond within 30 days. If you do not, then you risk having the IRS review and adjust your total tax liability without getting your input. In addition to responding quickly, you will also want to take a thorough look over the notice. It will give you specific information on what is being examined, so that you can prepare for your audit knowing exactly what is being scrutinized.

Know your Rights

Do not let yourself get intimidated by aggressive IRS agents, as a taxpayer you have a set of rights designed to protect you and your money. You have the right to select where the audit takes place, when it takes place, etc. Do not let an auditor intimidate you in to having an audit at your place of business unless that is where you want it. To learn more about your rights during an audit, check out IRS.gov.

Take your Time

Just like you, the IRS makes mistakes and easily could have made one on your case. Take your time compiling your records and be absolutely sure you have everything that you need. Do not let an IRS agent push you into setting a date for your audit. Take as long as you need to gather all of the financial documentation that you need in order to justify the tax return in question.