IRS audits may be affected by the reduction in the agency's budget of about 2 percent compared to last year. Partly as a result of this, the overall audit rate for individuals may drop below one percent for the first time in six years.

Of course, the IRS has ways to try to make do with fewer resources. For one thing, it tends to target higher income taxpayers for audits at a higher rate than those with lower income.

And then there is the use of technology. According to IRS Deputy Commissioner Steven Miller, the agency puts tax returns through a computer program in an attempt to spot returns that raise potential issues.

One aspect of this electronic screening involves assigning returns to "tolerance levels." These levels are based on dollar values or other measurements that the IRS programs into its computers to trigger potential audits.

In practice, what this means is that if a given tax return's financial reporting falls within the tolerance level, a manual review of the return is less likely.

The IRS says that the protocols for the use of tolerance levels are not checked over annually. But clearly the agency cannot put everything on autopilot.

Source": "IRS audits may dip this year because of staffing shifts," Kevin McCoy, USA Today, 4-11-12

If you haven't been involved in tax litigation, you may scarcely be aware of the Tax Court. But if you do find yourself in a dispute with the IRS, you will quickly become aware of the court's key role. You may also become concerned about the difficulty of gaining access to it.

The court's cases range from disputes about the applicability of the "innocent spouse" rule to multi-million dollar cases affecting huge corporations. About three fourths of the cases involve individual taxpayers.

Many taxpayer advocates believe that the Tax Court should strive to make as much of its work as possible accessible online. After all, with so much at stake, the administration of justice must be seen to be as fair and transparent as possible.

There are currently only two options, neither of them efficient. The first is travelling to the court's offices in Washington, off of I-395. The other is to request the documents in writing.

The drawbacks to either of these approaches are obvious. Moreover, such documents are available online for other federal courts through a service called PACER run by the Administrative Office of the Courts.

Source: "Powerful but obscure Tax Court lags on access," Kim Dixon, Reuters, 4-25-12

IRS audits are another possible forum for videoconferences. Nina Olson, the National Taxpayer Advocate, has recommended that the agency develop the technological capacity to offer "virtual face-to-face audits" in the near future.

The need for such a service is made more compelling by ongoing problems with the process for correspondence-based exams. The IRS has been increasingly using the corr-exam procedure, despite the fact that taxpayers are much less likely to respond to it than to an audit notice.

The lack of response to corr exam notices is often due to the confusing nature of the notice - not to taxpayer indifference about the outcome.

The Taxpayer Advocate is firmly opposed to wide usage of corr exams. She argues that too often they can become an "unnavigable labyrinth" for taxpayers.

The Taxpayer Advocate Service (TAS) at the IRS has already initiated a pilot test of this type of videoconferencing. Among 75 regional offices around the country, the TAS has chosen the Jacksonville, Florida, office for the test.

With an IRS commitment to making it work, video technology has the potential to transform the way the agency relates to taxpayers.

Source: "IRS May Allow Virtual Face-to-Face Audits via Videoconference," Michael Cohn, Accounting Today, 4-4-12

When you do, IRS audits are much more manageable.

So you'd think that the agency itself would follow through on its own internal procedures. But according to an audit of the IRS released last month, the agency frequently lacked proof that people hired as IRS employees had been properly investigated for truthfulness and possible security issues.

The audit of IRS employee-screening procedures was done by the Treasury Inspector General for Tax Administration. The inspector found that in 507 of the 662 hiring actions under review, the IRS employment office did not have records to show that proper background checks had been conducted.

The regulations on the books say that job applicants to the IRS must submit to a rigorous screening process. This is supposed to include fingerprint checks using FBI records, for example, as well as verification that the applicant has fulfilled his or her tax obligations in the previous three years.

Clearly the IRS must do a better job with its own record keeping, particularly regarding the hiring process for employees who will be trusted with sensitive and confidential financial data.

Source: "IRS employee-screening records found lacking," Eric Yoder, Washington Post, 3-20-12

And yet IRS audits are very much skewed toward higher income taxpayers.

That is what the evidence shows. Overall, 1.1 percent of taxpayers were audited in 2011. But the rate of audits varied widely by income level. To be more precise, the rate gets higher for each level of income over $100,000.

For taxpayers with adjusted gross income between $100,000 and $200,000, the IRS audited 1.0 percent of returns last year. The audit rate for incomes between $200,000 and $500,000 was 2.7 percent and between $500,000 and $1 million it was 5.3 percent.

For those with incomes over $1 million, it was even higher. For taxpayers with incomes from $1 million to $5 million, the audit rate was 11.8 percent. This was a very substantial increase from 2010, when the rate for taxpayers in that income category was approximately 7 percent.

The IRS says that the increase in audits of wealthy taxpayers isn't a matter of targeting them for closer scrutiny. The reason for more audits relates, rather, to the recent offshore account disclosure initiatives. Many people with offshore accounts are high earners.

Source: "Audit rates of millionaires nearly double," Blake Ellis, CNN Money, 3-23-12

After all, there is big difference between using deductions intelligently, on the one hand, and criminal tax evasion on the other. Deductions help you to avoid more tax than you have to, which is perfectly legitimate.

So what are some of the more unusual deductions?

Consider, for example, a professional bodybuilder who needed to use loads of body oil during competitions to make his rippling muscles gleam. He claimed a tax deduction for the oil. When the IRS questioned the deduction, the bodybuilder took the issue to tax court - and won.

It's also worth noting that the rules on deductions for medical expenses are often quite expansive. In one case, a taxpayer with emphysema installed a home swimming pool because his doctor had ordered an exercise program. Regular swimming in the pool enhanced his breathing ability.

The tax deduction for the pool was valid, however, because the primary purpose was medical care.

These are only two examples. An experienced tax attorney can help you consider others that may apply in your specific case.

Source: "Still More Strange Tax Deductions," Robert W. Wood, Forbes, 3-21-12

There is still a big difference, however, between face-to-face IRS audits on the one hand, and so-called "corr exams" (correspondence-based exams) on the other.

This week, the National Taxpayer Advocate questioned the increasing use of correspondence exams. From fiscal year 2000 to fiscal year 2011, face-to-face audits increased by 56 percent, from 251,108 to 391,621. But correspondence-based exams increased far more - by 220 percent. In eleven years, they increased from 366,657 to 1.173,069.

The Taxpayer Advocate questions the fairness of this trend. "Today the IRS generally reserves face-to-face individual audits for the most affluent taxpayers," wrote Nina Olson, the taxpayer advocate, in a blog post.

Taxpayers are far less likely to respond to notice of a face-to-face audit than to a corr-exam. This can easily result in valid tax claims being denied by the IRS.

Given these considerations, it is scarcely surprising that IRS surveys have shown far greater taxpayer satisfaction with the process for face-to-face audits than for corr exams. The percentage of taxpayers who said they were dissatisfied with corr exams was over double the rate of those who were dissatisfied with the audit process (41 percent compared to 18).

Source: "Taxpayer Advocate Questions IRS Audit Effectiveness." Michael Cohn, Accounting Today, 3-13-12

Sometimes it takes an experienced tax attorney to convince the IRS to provide the innocent spouse tax relief that it should.

In one recent case, a woman named Cathy Lantz filed a joint tax return with her husband, an Indiana dentist, in 2006. It turned out that the husband was engaged in Medicaid fraud. Ms. Lantz argued that she had no knowledge of this, but the IRS still tried to hold her liable for all tax, penalties and interest on the joint return.

The tax bill that the IRS sought to enforce was nearly $1 million - $928,111, to be exact.

After a five-year battle in tax court and then in federal court, the IRS finally decided to drop the case last summer. The tax law clinic at Valparaiso University School of Law helped Cathy Lantz obtain innocent spouse relief.

The biggest change is that the IRS will be more inclined to allow equitable relief to an innocent spouse taxpayer in two key situations. One is when a spouse has suffered abuse at the hands of the other spouse. The other is when one spouse has exercised control of the couple's finances.

Source: "For 'Innocent Spouses,' A Helpful Shift in I.R.S. Policy," Carla Fried, New York Times, 2-11-12

Applying it to tax preparation makes good sense, too. This includes taking all reasonable steps to avoid IRS audits.

Some of those steps are straightforward. Rounding up your receipts and being clear about your tax deductions and exclusions from income.

You certainly don't want to pay any more tax when you have to. But you don't want to be overly aggressive either, and have to submit to an audit you could have easily avoided.

It doesn't make sense, then, to claim a deduction you probably aren't really eligible for. Or to claim to have given more money to charity than you really did.

It's true that in the 2010 tax year, only about 1.1 percent of people who filed a 1040 were audited. But the rate of audits was 12.5 percent - over ten times the overall average- for people who earned $1 million or more. This figure was up a full 100 percent from the previous year.

Taxpayers should also be aware that the IRS may scrutinize tax returns that appear to reflect a mismatch between the deductions claimed and the income reported. For example, an IRS audit could be triggered if a return contains many deductions for employee business expenses or vehicle expenses, but little or no reported income.

Taxpayers should also be careful to avoid inadvertent errors in compiling their data.

Source: "Know the triggers, avoid an IRS audit," Chicago Tribune, 2-17-12

FATCA is an offshore account enforcement law passed by Congress in 2010. It aims to enlist foreign financial entities in collecting tax owed to Uncle Sam by Americans with foreign accounts.

Though FATCA will not fully take effect until 2014, planning for the implementation of the law has already begun. There have strident objections to it by foreign banks and other financial institutions who assert that the cost of compliance will be excessively burdensome.

The latest development is that the U.S. and five European countries have agreed to an information-sharing deal that is supposed to help implement FATCA. The five countries are Germany, France, Britain, Italy and Spain.

Under the deal announced with the five countries last week, banks in those countries will share the data on American assets not with the IRS, but with their own national governments. Those governments, in turn, will share the data with the U.S.

This government-to-government approach for FATCA compliance is supposed to address the issue of national secrecy laws in the five countries involved. It remains to be seen whether other countries will take similar actions.

Source: "5 European Nations Agree to Help U.S. Crack Down on Tax Evasion," New York Times, 2-8-12

In other words, business income taxes involve a fine line. Our tax system is based on the premise that both individuals and businesses will pay their fair share. But if businesses are subject to too many reporting requirements, it becomes harder for those businesses to generate the jobs America needs to regain strong economic growth.

Consider, then, one particular tax reporting requirement: a relatively new one involving 1099-K reports. In 2008 legislation, Congress required the IRS to collect 1099-K reports from credit card companies and other third party payment companies. The purpose is to document credit transactions that have occurred within a merchant's business during the tax year.

Two members of the U.S. House are offering a bill to address this concern. The proposed bill is called the 1099-K Overreach Prevention Act. It would restrict what the IRS is allowed to do with data from 1099-K reports submitted by third parties. The IRS would not be able to require businesses to reconcile these reports with their own internal records.

The proposal has support from the U.S. Chamber of Commerce, as well as the National Federal of Independent Business.

Source: "Lawmakers Introduce Bill to Limit 1099-K 'Overreach'," Accounting Today, 2-7-12