U.S. GOVERNMENT IRS auditing more federal tax returns
Computers also are catching more errors on returns.
WASHINGTON (AP) -- It's enough to cause a momentary panic, to make your heart race and blood pressure rise. A letter from the Internal Revenue Service just can't be good.
The government has been examining more tax returns, doing more audits and independently verifying more information. Large corporations and wealthy individuals, in particular, have been in its sights.
Yet the chance of an audit remains small. Last year, the IRS looked at about 1 in 129 returns filed by individuals and families. The rate increased to 1 in 68 when incomes rose above $100,000.
That still lags the pace set in the mid-1990s, when the agency looked at about 1 in 60 individual tax returns.
But the IRS doesn't always need to conduct a full audit to catch mistakes and missing information. It increasingly relies on computers to verify what's reported, making it harder for taxpayers to hide some types of information. That doesn't always mean the IRS is right and the taxpayer is wrong. One thing is certain, experts say, and that's the importance of answering any letter sent from the IRS.
"Taxpayers have to respond to the IRS. They can't be ostriches," said National Taxpayer Advocate Nina Olson, who helps taxpayers resolve problems with the IRS. "You have to pick up the phone, even if you just want to just go hide. It won't go away."
Just ask Richard Hatch, who failed to include on his tax return the $1.01 million he won on the first "Survivor" reality television show. Survivor Entertainment Group reported the payments to the IRS, and the tax collectors caught up with him.
The IRS gets more than a trillion such documents each year from employers, banks, brokerages and other institutions, reporting the payments they made to taxpayers.
"That allows us to come in each year and look at the tax return that individuals are filing and run a match," said Linda Stiff, deputy commissioner for the IRS division that conducts most audits.
It also helps the IRS find people who earned income but didn't file a return.
The IRS last year reached out to more than 2 million taxpayers after comparing such documents to tax returns, Stiff said. The agency also recently started checking information reported on Schedule K-1 documents, which cover income, deductions and credits from partnerships, trusts and S-corporations.
IRS document matching programs mean taxpayers should act quickly to correct any errors in the statements they get from their financial institutions, said Bob Sharin, editor of RIA's Practical Tax Strategies.
Even if you report the correct information on your tax return, the IRS will only know that the information you provide differs from the information the third party provided.
Some of the most common problems that generate letters can be avoided by filing electronically and letting the computer check for valid Social Security numbers and math errors. If you fill out the forms by hand, make sure to double- and triple-check your work.