Expect Even More Audits in 08

Because of increasing pressure from Congress and the President, the IRS has began an effort to increase the number of audits they perform to help lower the ever growing tax gap. Eliminating the tax gap – estimated to be $312 billion to $353 per year – would provide enough money for the federal government to pay for Medicaid’s entire 2007 budget.

The IRS has publicly announced that it plans to do more random audits in the next few years than it has in the past. In addition, the IRS plans to conduct more audits of high-risk groups. The Government Accountability Office recently concluded a detailed study on the tax gap and informed the IRS on which high-risk groups have the highest percent of misreporting on their tax returns.

With help from congress, The Government Accountability Office has identified the following groups of taxpayers to have the highest rates of misreporting on their tax returns:

- Taxpayers who gamble and underreport their winnings
- Taxpayers who own a farm or are involved in farming
- Taxpayers who take advantage of the Earned Income Tax Credit when
they don’t qualify
- Sole proprietors reporting on Schedule C forms
- S corporations where owners aren’t taking enough wages in an effort
to minimize payroll taxes
- Taxpayers who incorrectly report capital gains from sales of
investments
-Taxpayers who take itemized deductions on Schedule A for medical
expenses, charitable contributions, and non-reimbursed job expenses

However, being in one of these groups does not always mean a taxpayer will be audited. Based on 2005 statistics, a taxpayer’s overall likelihood of being audited by the IRS was around 1%. But if a taxpayer falls into one of the groups listed above their likelihood of being audited rose to above 5%.

The IRS had discontinued its random audit process five years ago in an effort to be seen as a kinder and gentler agency of the government. However, because of intense pressure to increase revenue to offset the tax gap, the IRS has decided to once again target not only returns that raise red flags, but to also select taxpayers to audit at random.

The IRS is warning that not all taxpayers audited will be subject to a scrupulous line by line audit though. Out of the 50,000 returns the IRS aims to audit, they estimate that 8,000 will just be examined by the IRS requiring no action on the part of the taxpayer, and 9,000 of the taxpayers audited will be able to respond to audit inquiries via mail. The remaining 30,000 taxpayers will be required to make face-to-face meetings though. Many of these audits are to be conducted even if the IRS does not suspect a problem, but the IRS is claiming they hope to use the audits to gather information about taxpayer norms.