Just in case, be prepared for an IRS audit

Personal Finance. By Katherine Vogt, AMNews staff. April 12, 2004.

Hundreds of millions of Americans are sighing with relief after getting taxes filed. But not everyone should be so relaxed.

A small group of unlucky taxpayers is in for more work. They are the filers who will receive a notice telling them that they are being audited.

The latest statistics from the Internal Revenue Service reflect that the agency is ramping up its audits, particularly for high-income taxpayers, who are defined as earning $100,000 or more. In 2003, the IRS audited 139,379 high-income taxpayers, an increase of 24% from 2002 and up 52% from 2001.

Overall, the IRS audited 849,296 taxpayers in 2003, up 14% from the year before. The figure represents less than 1% of all tax returns filed, and the high-income taxpayers were audited at a rate of just more than 1% of their income bracket.

While the number of audits is small, it's clear that the IRS has its sights set on higher-income taxpayers. So experts say taxpayers should know the basic steps for surviving an audit in case their number gets called. They say physicians, whose incomes tend to be higher than average, should pay extra attention, because they have a greater risk of being audited.

A notice in the mail signals an audit. "Most people go into panic mode and get pretty alarmed," said Jerry Love, a CPA and certified financial planner who is president of the Abilene, Texas, accounting firm Davis, Kinard & Co. Taxpayers should put their panic on hold and concentrate.

"The first thing they need to do is very carefully read that letter and determine what it is asking for," Love said. It should let the taxpayer know in general what type of information or clarification is being sought as well as what type of audit has been ordered.