IRS Stepping Up Tax Audits

April 9, 2006 — -- The IRS says honest taxpayers should be grateful that audits are on the rise -- because they pay more when others cheat.

There is no question the tax agency is getting more aggressive, going after the very rich and some other groups you might not expect.

Every year at tax time, Americans face dueling urges -- on one hand, to pay the tax they owe; on the other, to protect their hard-earned wages.

"I think there's always a temptation to cheat," says Leonard Coby, a physician's assistant. "I think you feel it every time you sit down with your taxes and you go, 'How much money are they taking out of my pay?' "

Those who act on that temptation, be warned: Nearly one in every 100 taxpayers was audited last year -- double the number who were audited in 2000.

In the late 90s, cowed by Congress, the IRS scaled back its enforcement efforts.

IRS Commissioner Mark Everson thinks that was a mistake. He says as the number of audits went down, the number of cheats went up.

"We've been particularly concerned about high-income individuals and corporations. Now we've increased the audit rate for millionaires -- it's up to over 5 percent," says Everson.

But low-income taxpayers are being targeted too. The IRS has discovered the earned income tax credit, meant to serve as an incentive to work, has become -- for some -- an incentive for fraud.

"Unscrupulous tax preparers have been preparing returns that have been overstating people's income to maximize the earned income tax credit -- strange as that may sound," says Tom Ochsenschlager, Vice President of the American Institute of CPAs.

The tax man is also cracking down on the self-employed, half of whom under-report their earnings.

"That is the worst thing people can do," says Gerald Weinger of R&G Brenner Tax Consultants. "If you make an error in the deductions, you know, you can say yeah, I guessed wrong, but you can't say I didn't get $10,000 for doing this job."

Other red flags that can lead to audits include simple mistakes like leaving off a signature or forgetting to check your math. Returns that are vastly different from the year before can also draw attention.