Your IRS Audit Risk
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A few years ago, the IRS came under fire
for lowering the number of audits they were performing. Audits of wealthy individuals
were
down to only half the level of 1992. Total corporate audits were decreasing as well and the
total number of experienced auditors was down significantly from prior years. One contributing factor in the audit decline that many critics tend to overlook is the tax simplification measures taken a few years ago. Whether the Code was actually simplified is open to debate, but many of the loopholes and tax shelters that proliferated in the 1980's were indeed eliminated. |
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The IRS has also changed its auditing strategy to some extent. As we
reported a few months ago, the "random" audit has been eliminated and instead,
the agency looks for "red flags" in your return. A red flag can be anything that
is above or below industry norms. For example, reporting travel and entertainment expenses
which are 25% of your total revenue may get your return pulled for an audit if the
"norm" in your industry is 5% of revenue. Another strategic change is how the IRS selects businesses for audit. The agency now conducts detailed studies to determine which industries (and what areas of those industries) it will select for audit. That does not necessarily mean your business will get selected for an audit if it is in one of the targeted industries, but it probably will increase your chances of being selected - especially if you have a "red flag" on your return. The industries currently being targeted by the IRS are as follows:
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