Audit I Forget..?

While many tax payers are done for the year, the question lingers.  What are the odds the IRS will put you on the “A” list –  as in to be audited?   Last week, the IRS released its tally sheet of who was audited in their 2010 fiscal year.  In general  the rates were up.  Also generally, the recipients of additional IRS attention were the usual suspects:  individuals with income between $200,000 and $1 million, businesses with gross receipts of more than $25,000 and individuals claiming the earned income credit.  Higher income puts you at the top of the class.  Corporations with assets of $100 million or more had a 14.5% chance of an audit, vs. those with $250,000 to $1 million at a 1.3% chance of getting a notice.  Give the IRS some credit; they go where the money is.

So if those are the odds you’ll be investigated, what are the chances it’ll cost you?  According to the  data book, the IRS assessed financial penalties against 27.1 million individuals last year.  More than half of those were for failure to pay tax.  Only a little more than 1.1 million businesses suffered the same fate, with 42% of the assessments related to failure to pay.  If the IRS decides to look at criminal investigations, the numbers get more serious.  Of the roughly 3,000 cases referred for prosecution, more than 2,000 resulted in conviction.  Almost 82% of those convicted were incarcerated (home confinement with an electronic bracelet is included in those numbers.)  Don’t say I didn’t warn you.

Speaking of warnings, the IRS does have a special program started in 2010 to audit businesses for payroll taxes.  (For more detailed discussions about the program specifics, you can go to my post “Going Where the Money Is”).  Word is the issue they’re most focused on for these audits is whether employees are properly classified as “employees” or "independent contractors”.    While at a high level the idea of someone who has more discretion on how the work gets done is usually contractor material, there are lots of grey areas.  For sure you don’t want the IRS discussing the topic with you.  It’s worth asking a trusted advisor who knows about this type of thing if you are operating in shades of grey.  If so – move into black and white territory as fast as you can.   It’ll beat wearing an orange jumpsuit.