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Higher income tax bracket means higher chance of audit

Whether you are an entrepreneur in Amarillo, or a doctor in Dallas, Texas, your reaction to an audit letter from the IRS is probably similar -- anxiety. Depending on your income bracket, you are either more or less likely to receive that letter.

A recent report revealed the percentage of individuals who are likely to be audited by the IRS, based on their income tax bracket. For millionaires, the news is not good. People earning $1 million to $5 million are audited 11.8 percent of the time, up from seven percent the prior year. For those earning $5 million to $10 million, there is a 20.8 percent chance of an audit. By comparison, those earning $25,000 to $100,000 are audited slightly less than one percent of the time.

Apparently, there are a number of reasons for this difference. One reason stated is that those in a higher income tax bracket have more complicated IRS tax returns, with more and varied investments. An increase in the number of forms in a tax return can increase the number of opportunities to make an honest mistake.

Another reason is related to the IRS' effort to increase tax revenue. With that in mind, the IRS is attempting to gain tax compliance related to income earned from offshore bank accounts. The IRS has created incentives to convince those with foreign bank accounts to declare their earnings from those accounts.

Another consideration in this scenario is simply the economy of scale. Ten tax audits of millionaires are conceivably more likely to net more tax revenue in comparison to ten tax audits of those in the $50,000 to $75,000 income tax bracket.

For those who are being audited, it is assuredly a good idea to have your attorney or other tax professional present during any discussions with a tax examiner.

Source: CNN Money, "Tax audit rates of millionaires nearly double," Blake Ellis, March 23, 2012

6 Comments

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