Tax audits are in decline, but risk is greatest for higher earners

Tax day has come and gone for most California taxpayers, but for some the anxiety of looming deadlines has been replaced by fears of being audited by the IRS. Fortunately, for many taxpayers - but not all - the risk of audits is in decline.

According to IRS data, the chance of being audited has dropped by nearly one-fourth for the average taxpayer during the past three years. Overall, the risk of an IRS audit for all individual taxpayers nationwide was about 0.9 percent; the lowest rate in seven years. The decline corresponds to budget cuts and staff reductions at the IRS that have resulted in fewer resources being devoted to auditing activities.

Still, for some higher-earning households, the risk of tax audits remains relatively high. Specifically, taxpayers with incomes of $200,000 to $1 million per year are more than twice as likely to be audited, and the risk continues to rise at higher income levels. Those whose incomes exceed the $1 million mark are audited about 7.5 percent of the time, or more than eight times the national average.

An audit does not imply wrongdoing

Unfortunately, while being honest and thorough on your tax returns can go a long way to help minimize the likelihood of a tax audit, there is no way to fully eliminate the risk. If you receive notice of an IRS audit, there is no need to panic.

At face value, an audit is simply the government's way of asking for more information to verify that your tax return is accurate and that the amount of tax you have paid is correct. An audit, in and of itself, does not mean that you have broken the law or done anything wrong.

One of the best ways you can prepare yourself for a potential audit is by keeping clear, thorough and accurate records of your income, deductions and other financial matters at all times. These documents will help you verify the accuracy of your returns during a tax audit and may be critical in building a defense in the event that you are accused of any wrongdoing by the IRS.

Get legal help for tax problems

If you have received notice of a tax audit, whether as an individual or as a business owner, it is in your best interest to seek advice from a knowledgeable tax attorney. The Tax Litigation Law Office of Scott Kauffman provides experienced representation to clients in and around Orange County in a wide range of tax related matters.