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Latest IRS Data Book Details Extent of Audit Activity

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    People who face the challenge of a pending IRS audit turn to tax attorneys not only for advice and representation, but also for immediate peace of mind. Questions about audits, IRS timelines and strategies for repayment are important, but so is the reassurance that a taxpayer has legal rights to due process when federal tax investigators come knocking.

    The latest Internal Revenue Service Data Book details a wide variety of IRS activities from fiscal year 2011, ranging from enforcement and collection activities to taxpayer assistance programs and efforts to clarify tax-exempt status. The report also contains a series of statistics regarding taxpayer “examinations,” the agency’s term for a tax audit.

    The IRS processed nearly a quarter of a billion returns in fiscal 2011, including individual income, corporate income, and employment income tax returns. To follow up on apparent discrepancies or violations of the law, the IRS distinguishes five levels of federal tax return examination activity, including:

    • Notifying taxpayers that the IRS has information showing income for a taxpayer who has not filed a tax return
    • Correcting a mathematical error or other mistake on a submitted return
    • Informing taxpayers about records of income it has that do not appear on filed tax returns
    • Conducting examinations by mail, also known as correspondence examinations
    • Conducting face-to-face audits, or field examinations

    During fiscal year 2011, the IRS examined just over one percent of all individual income tax returns filed in 2010, as well as a slightly higher percentage of corporate income tax returns.

    The IRS Data Book breaks down examination rates of individual non-business returns based on income and whether the taxpayer submitted additional forms such as Schedule C, E or F or Form 2106. Not surprisingly, taxpayers in the highest income bracket (over $1 million) had the highest examination rate. More than 12 percent of these returns were examined, and nearly seven percent of high-income taxpayers were subjected to field examinations.

    For taxpayers with total income below $200,000 who submitted no additional schedules or forms, only .06 percent of returns were subject to face-to-face audits. Yet this still means that nearly 44,000 Americans in those circumstances faced close scrutiny from IRS investigators.

    Whether notice of a tax audit is no surprise to the taxpayer or an unexpected and unwelcome shock, a consultation with an IRS audit lawyer can help a client prepare for federal tax scrutiny. A tax attorney who also has accountancy credentials can provide further insight into the complex frontier where financial data and IRS regulations meet.

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