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Wealth and the triggering of audits

As always, wealthy taxpayers face a significant chance of IRS scrutiny. While IRS audits are not occurring at the same rates as in the past, individuals with considerable wealth still face a significant chance of having their tax returns audited.

The crackdown on the wealthy became more intense in 2009 following an agency announcement. By 2011, individual taxpayers with income of $10 million or more faced a 30 percent chance of an audit. Though the current rate of audits for this same income group is now at16 percent, the audit rate for the general population is much lower at 0.86 percent.

Such audits often result in significant headaches for taxpayers. For example, one hedge fund manager faced an audit lasting more than one year which required the production of over a 1,000 pages in data. A ciberdata expert and specialists examined his estate and gift tax information as well as documentation pertaining to his hedge funds. At the end of the audit, he ended up owing no taxes. The primary trigger of this audit possibly involved this individual’s wealth.

The IRS has the ability to crosscheck returns with information regarding benefits and salaries from partnerships or corporations. This may involve crosschecking K-1 forms claimed by partners, etc. For this reason, there are a variety of actions wealthy individuals should take to reduce the chances of an audit including:

  • Provide a note with your tax returns explaining any unusual activity that may lead to IRS inquiries
  • Keep excellent records
  • Correctly report amounts held in foreign bank accounts as undisclosed foreign assets raise red flags with the IRS
  • Pay proper attention in reporting income on state and local tax forms as well as federal forms
  • Always provide adequate documentation

There are also many reasons why tax litigation attorneys play an important role when it comes to audits and appeals of audits. While ensuring compliance with a host of complex tax regulations, these professionals also help you locate tax credits and deductions that reduce your tax liability. And when disputes arise regarding the amount of tax you owe, tax lawyers can fight for you in the event of an IRS audit.

Source: Barron’s, “How to Lower Your Audit Risk,” Karen Hube, Nov. 28, 2015

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