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April 3, 2013


Chances of Tax Audit Rise With Income

In a nation based on the values of liberty and equality, someone’s income level shouldn’t really affect their chances of an IRS tax audit. After all, equality before the law is such a key value for us as Americans.

You’d think, then, that it shouldn’t matter whether you are rich, poor or middle income. The likelihood of having your tax return audited wouldn’t depend on your income. In Texas and across the country, belief in that type of fundamental fairness is practically an article of faith.

And yet, when one looks at the data regarding who actually gets audited, it is clear that high-income taxpayers are more likely to be audited than those of lower income.

Overall, only about 1 percent of people are subjected to an audit. But for taxpayers making more than $5 million a year, the percentage that are audited is 21 percent – more than 1 in every 5 returns. The rate is even higher for those whose income exceeds $10 million.

It would seem to be a fair inference that, in some sense, the IRS follows the money when deciding which returns to audit. It isn’t that taxpayers become more dishonest as their income level rises.

But with higher income, tax returns typically become more complicated. There may be more charitable deductions, more business expenses, and so on. On a more complicated return, the chances increase that the IRS may find something to question. And of course there is also more money at stake in taxes, the higher the income goes.

The IRS also has ways to try to identify whether you wealthier than your tax return appears to indicate. For example, if you live in a wealthy neighborhood, the agency’s computers flag questions about how someone with your reported income is able to live there.

Source: “12 tax audit red flags – You’re rich, ” CNN Money, 3-21-13

To learn more about our practice, please visit our page on IRS tax audits.