At NewPoint Law Group, LLP, we recognize that there are often significant misconceptions about the tax system and the tax agencies’ enforcement of laws. People may take comfort or even find horror in the stories spread among family and friends. However, people are often surprisingly hesitant to ask questions about the truth of widely-held beliefs regarding tax enforcement.
The attorneys of NewPoint Law Group, LLP have prepared this post to address the popular belief that wealthy individuals are subject to more audits than people of normal means. If you have questions regarding your risk of facing a tax audit or regarding steps you can take to minimize the consequences of a tax error, contact a Sacramento tax lawyer from NewPoint Law Group, LLP by calling 800-358-0305 or contact us online today.
Individuals with Significant Annual Income Face the Highest Risk of a Tax Audit
Unfortunately, the oft recited fact that individuals with significant income face a higher than average risk of an audit is true. In truth, individuals who report income of $10 million or greater face the highest risk of a tax audit. This fact was revealing in 2010 by then IRS Commissioner Doug Shulman, who stated that the IRS would “work smarter” by:
“… focusing on individuals with tens of millions of dollars of assets or income. Going forward, [they] will take a unified look at the entire complex web of business entities controlled by a high wealth individual, which will enable [them] to better assess the risk such arrangements pose to tax compliance.”
Thus, IRS efforts have been targeted towards high-earning taxpayers for a number of years. In 2014, taxpayers who earned more than $10 million faced the highest risk of an audit, as 16.22 percent of returns in this income bracket were audited. Since tax returns reporting greater than $10 million in income made up just 0.01 percent of returns filed, these individuals face a high risk of an audit. Individuals who report single-digit income in the millions also face higher-than-average audit rates. Just over 10 percent of taxpayers reporting income between $5 million and $7 million were audited in 2014. And 6.21 percent of taxpayers reporting income between $1 million and $5 million were audited over the same period. For context, consider that merely 0.65 percent of taxpayers reporting income between $100,000 and $199,999 were audited during the same time period. Clearly, high-earning individuals face a much more significant audit risk than other taxpayers.
Why Does the IRS Target High-Income Individuals?
In a time when IRS staffing and funding levels have fallen in relative and absolute terms, the agency is allocating resources in a fashion that is likely to provide a maximum return on the audit dollar. Essentially, the agency was force to make choices about its enforcement priorities. The management believes that focusing on high-income individuals is likely to return the greatest return on the audit dollar.
Now, some might assert that a broad-based approach is the most effective approach to deterring tax fraud and tax evasion. They may have a point. However, all taxpayers are theoretically subject to audit. The reason for focusing on high earners isn’t just that this is where the money is, it is also because high-income individuals are more likely to have complex finances. High-income individuals may engage with financial planners and implement aggressive tax minimization strategies. Often, these strategies can include offshore accounts which must be reported on an annual basis. When these accounts are not reported – even accidentally — penalties can exist under both FBAR and FATCA.
Contact Our Sacramento Tax Lawyers Today to Protect Against a Tax Audit
If you routinely report significant annual income, you may be wondering how you can minimize the risk of facing an audit. The avoidance of raising any red flags can certainly reduce the risk of an audit, but some high-income taxpayers will face a tax audit regardless. Therefore, it is prudent for taxpayers to ensure that all tax positions they take are well-supported. Furthermore, they should ensure that all their tax documents are in order and that evidence exists for any claims, deductions, credits, or other tax positions.
The Sacramento tax audit attorneys of NewPoint Law Group, LLP can assist high audit risk taxpayers minimize their odds of raising additional red flags. We can also identify whether you are more likely to face an audit and suggest tax minimization strategies that are sound and unlikely to be challenged. If you are audited, we can guide you through the process from start to finish while also working to minimize the consequences you face. To schedule a confidential consultation at our Roseville or Folsom tax law offices, call 800-358-0305 today.