What is your chance of being audited by the IRS?

June 10, 2011 by Mike Verville

The IRS just released the audit statistics for individuals audited in fiscal year 2010.  Overall, exam rates for individual returns rose to 1.11%.  The last time the audit rate was that high was in 1997.

If your adjusted gross income was $1 million or more, your audit rate increased to 8.36% or 1 out of every 12 returns.  Your chance for an IRS audit doubles if you had the following on your tax return:

1- Adjusted Gross Income in excess of $200,000

2- Schedule C tax returns with gross receipts of $25,000 or more

3- Earned income credit claimed on your return

The IRS continues to feast on S Corporations that pay very low salaries to owners.  Low salaries allow the bulk of the income to pass through to the owner without paying payroll taxes.  A recent case involving a CPA resulted in the district court ruling that the CPA’s salary was too low.  The CPA paid himself $25,000 in salary.  However, his S Corporation earnings were $200,000.   The court reclassified the S Corporation distributions as wages.

Business owners and individuals that keep proper records and can substantiate their deductions have little to fear regarding an IRS audit.  However, the time involved and hassle of an IRS audit can be drag.

At Wallace Neumann & Verville, LLP, we work hard to prepare your return so it is in accordance with Federal tax laws.  If you have any tax questions, please feel free to contact us.

For a FREE no obligation consultation regarding our tax services