Tax audits on decline in some areas, increasing in others

The number of tax audits conducted by the Internal Revenue Service has been falling since 2009, Bloomberg News reported recently, but enforcement actions against certain types of taxpayers are still on the rise.

Owing in part to federal budget cuts that have reduced IRS staff by 8,000 workers - including 5,000 auditors - the agency reported a 13 percent drop in the revenue collected through tax enforcement actions since the 2010 fiscal year. This translates to about $50 billion collected from tax audits in 2012, down from approximately $58 billion in 2010.

More audits for businesses, fewer for individuals

Individual taxpayers are among those who appear to be receiving less IRS scrutiny in recent years. In 2010, the agency audited one out of every 90 individual taxpayers, while in 2012 the individual audit rate fell to one in 97. The agency also appears to have decreased its oversight of estate tax filings; in 2012, estate tax audits decreased by about 10 percent.

Businesses, on the other hand, are being viewed more critically by the IRS even as audits have dropped off in other areas. Overall, enforcement actions against corporations have jumped by 9 percent since 2009, Bloomberg reports, while S corporations and partnerships both saw their audits increase by about one-third between 2010 and 2012.

Protect yourself from tax audits

Because the IRS sometimes gets it wrong, audits can strike anyone - regardless of whether they have actually violated the law. Because audits can be costly, stressful and time consuming, it is wise for taxpayers to take steps to help minimize the risks of an audit.

Naturally, one of the best ways to avoid an audit is to be honest and thorough when filling out a tax return. However, taxpayers may be able to further reduce the risk of audits by keeping the following tips in mind:

  • Keep business and personal expenses separate. One of the most common ways that people get themselves in trouble with the IRS is by mixing up their business and personal expenses. To avoid raising a red flag that could trigger an audit, be sure to keep detailed records of all business expenses and deduct only those expenses that actually go toward running your business.
  • Avoid big changes in your charitable giving. People who report big changes in donations from one year to the next may attract the attention of IRS auditors, particularly if there is no corresponding change in the taxpayer's reported income.
  • Be careful when claiming a home office deduction. Many people claim home office deductions incorrectly, which means that the IRS may view them with a higher level of scrutiny than other deductions. Generally, you should not claim a home office deduction unless it is your primary workplace and is not used for any other purpose.

If you receive notice that you are being audited by the IRS, be sure to get help from a reputable tax lawyer. An attorney with experience defending against tax audits can be a powerful advocate at every stage in the process and will work hard to make sure your interests are protected.