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We have extensively discussed small business payroll taxes and offshore bank accounts in previous posts, including the related tax issues that may arise for Orange County residents. Often taxpayers who have offshore bank accounts or own businesses that have payroll tax obligations are wealthier than the typical California taxpayer. These successful individuals are unfortunately much more likely to become the target of an IRS audit according to some reports.

The threat of an IRS tax fraud audit can be a terrifying experience for even the most sophisticated California businessperson. There are several tax-fraud related issues that may arise during an audit, including overstated expenses, overstated charitable contributions and unreported business income. There is also an increasing amount of audits launched against high income individuals and California business owners. An experienced tax law attorney will be able to guide California taxpayers through the audit process and handle the sometimes intimidating communications from the IRS.

The audit rate for the average California taxpayer is only 1.1 percent last year but the audit rate was 8.4 percent for those who had an income of over $1 million. More shockingly, the audit rate for taxpayers with incomes over $10 million was 18.4 percent, which was up from 10.6 percent the year before.

High income audits are also treated differently than the typical taxpayer’s audit. Instead of a single IRS agent reviewing a Form 1040, the IRS’ wealthy taxpayer unit will unleash a team of auditors to examine all of the taxpayer’s filings. This team of auditors will have different specialties and thoroughly dissect a wealthy taxpayer’s filings.

In our next post we will discuss some things that may trigger an IRS audit.

Source: Barron’s, “How the IRS Is Probing the Rich,” Karen Hube, Sept. 17, 2011