The IRS is reportedly doing fewer audits these days. What are the newest dangers of being audited and safeguards for the wealthy to prevent audits?

The number of IRS audits in 2018 dropped by almost half compared with 2010 numbers. From 2017 to 2018, the federal audit rate for taxpayers making between $1 million and $5 million fell from 3.52 percent to 2.21 percent, according to Robert Seltzer, CPA at Seltzer Business Management in Los Angeles.

“Knowing that fewer people are being audited reduces fear, especially for higher income taxpayers,” he says.

Yet IRS surveys indicate that almost all taxpayers want high-net-worth individuals audited more closely even as fears of audits decline. (The agency admits that it audits the poor about as often as it audits those in the top 1 percent of income earners.)

“There’s an inference by some that high earners must be doing something untoward,” says Richard J. Kollauf, CFP/CPA with BMO Private Bank in Milwaukee.

“Most think people who make more than they do should be audited more often,” says Dennis W. Cole, CPA and managing partner with Beers, Hamerman, Cohen & Burger in New Haven, Conn.

One factor that will reduce audits for some wealthy taxpayers is the increase in the standard deduction and elimination or curtailing of many itemized deductions. “If a taxpayer has paid off their residence, the only way that they will itemize is if they have very large charitable deductions,” Seltzer says. “If not, they won’t itemize and there’ll be less reason for the IRS to look at their return.”

But wealthy people are far more likely to be audited because they have the money, says Daniel Morris, a senior partner at Morris + D’Angelo CPAs in San Jose, Calif. “And, more importantly, most seek ways to mitigate their overall tax burdens, and … mitigation strategies are frequently subject to interpretation.”

Most wealthy taxpayers “have places in their returns that are subject to interpretations: basis records, poor bookkeeping, personal benefits associated with charity donations,” Morris says. The wealthy also have income in different forms and through multiple layers of activities.

The IRS has been replacing auditors with data miners and other technologists, Morris adds, “so people are frequently reviewed/audited in stealth mode, meaning the IRS may score the return, review details and invest up front to determine if there is value in a full-scope audit.”

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