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Save This PageBased on the amount of income that Americans fail to report every year -- $345 billion, according to one government report -- millions of Americans have little fear of a government audit.
But tax pros and government reports suggest the Internal Revenue Service is gradually shedding its "kinder and gentler" attitude in favor of more and stricter audits. In short, an audit could be like a truck in your side-view mirror: closer than it appears.
In January, the IRS said audits for the fiscal year ended Sept. 30 climbed 7 percent for individuals, 14 percent for taxpayers earning more than $100,000, and 30 percent for those making $200,000 or more.
Millionaires had a 1 in 11 chance of losing audit roulette.
The audits are even hitting low-income taxpayers, said Paul Harrison, the coordinator of the low-income taxpayer clinic operated by the Community Tax Law Project in Richmond.
"It is definitely a matter for concern," Harrison said.
The nonprofit organization has seen a 250 percent increase in the number of audit cases that it helps low-income taxpayers with since 2004. The group had 156 cases last year, up from 45 cases in 2004.
The Community Tax Law Project provides legal representation to taxpayers facing tax law disputes. Their clients must earn less than $26,000 for a single person or less than $53,000 for a family of four.
"Most of these audits . . . result in no change," he said. "The IRS seems to be generating more audits that result in no increased collection of revenue, but, of course, it costs money to do the audit."
Daniel D. Morris, a tax partner with Morris + D'Angelo in San Jose, Calif., said the risk of audits is way up. "The management of the IRS has basically said, 'Audit harder, audit more rigorously and collect more money.'"
The auditor's traditional favorite quarries include the wealthy, the self-employed, the owners of cash-intensive businesses.
But evidence suggests federal auditors are seeing ample targets among:
But that practice can easily run afoul of rules that limit the amount of interest on home-equity loans that homeowners can deduct.
Generally, homeowners can write off interest on up to $1.1 million in loans -- including $100,000 in equity loans -- to buy or remodel a home.
But deductions can get crimped depending upon how much you paid down the original loan, whether you siphoned off cash to remodel or for vacations and personal uses, whether you owe the alternative minimum tax and other factors.
Meanwhile, the spouses cutting checks often wrote off alimony that the divorce decree stipulated was neither taxable nor deductible, or erroneously deducted child-support payments.
The IRS doesn't get much bang for the buck when it audits most of those businesses, with half of them understating income by only $900. But 10 percent of such businesses -- more than 1 million all told -- shaved an average of $6,200.
Typically, auditors look for records such as logs to determine how much such property was used for personal reasons.
Last year, taxpayers lost two Tax Court cases involving cell-phone deductions. One woman lost because she failed to keep adequate records, while a couple was denied a deduction for their flat monthly fee.
Lawrence K.Y. Pon, a certified public accountant in Redwood City, Calif., said a "super strict" auditor "literally took the phone bill apart to figure out what was deductible or not," Pon said. "Who does that?"
Deputy Business Editor Gregory J. Gilligan and McClatchy Newspapers contributed to this report.
