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More money means higher risk for audit

It does not seem fair — and it probably isn’t. However, the more income that you earn, the higher chance you have for a tax audit conducted by the Internal Revenue Service. The overall chance of falling on the receiving end of a tax audit is about 1 percent — or that is at least the amount of people who have been audited by the IRS in a few years. 

A 1 percent chance does not seem very high. It isn’t, but that counts every single taxpayer. But what happens when you break it down by income? The percentage risk increases significantly. For those who make more than $10 million, there is a 27 percent chance. For those with $5 million, it is 18 percent, and so on. 

According to the IRS “the potential [for an audit] is high that an examination of your return will result in a change to your income tax liability.” The IRS uses resources to conduct an audit, and they want it to pay off. 

The “Discriminant Inventory Function” system is a computer program that helps determine whether a taxpayer will be audited. A formula uses a number of factors, including the comparison of an income return against other reporting sources. If the agency finds a discrepancy, an audit likely follows. 

In other cases audits occur without the DIF computer program, but as a result of “tips” that are made to the IRS. In some cases it might be an employee that suspects something, an angry ex  or anyone else. The IRS even chooses some at random.

What do I do if I’m audited? In some cases, it might be a simple notice that clarification is needed. In other cases, it is more complicated than that. Even where it seems as though a simple response is all that is necessary, a taxpayer in Minneapolis can benefit from a quick look with an attorney. 

Source: The Wall Street Journal, “Chances of an Audit Grow With Income,” Tom Herman, May 12, 2013

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