Tax Audits on High Earners Are Rising -- Here's How to Respond

As pressure from Congress to raise revenue and close the multi-billion dollar “tax gap” continues, the Internal Revenue Service is increasing the number of audits against high-net-worth individuals.

The IRS, as a result of increased funding and directives from Congress, is currently hiring a vast number of tax auditors and collectors, and creating special new units to use a wide spectrum of tactics for investigating wealthy taxpayers for tax compliance. A recent article in the New York Times reported that taxpayers who earned at least $1 million had an 8 percent chance of being audited in 2009, meaning roughly one out of every 12 returns was scrutinized. That’s up from 6 percent in 2008.

Most U.S. citizens take great pride in paying as little tax as legally possible, and they will pay good money for this right. But as the government tries to squeeze taxpayers for more than what they perceive as fair, animosity will begin to build, sometimes with catastrophic results. (To be fair, this deficit-reduction strategy can be found in areas represented by both sides of the aisle, and on the state level as well.)

If you receive an audit notice from the IRS, here are six things you should know to move forward:

Don’t panic. Many of these letters can be dealt with simply and painlessly. There are a number of reasons why the IRS might send you a notice. Notices may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.

Follow the Instructions. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry. If you receive a correction notice, review the correspondence and compare it with the information on your return.

Don’t Put It Off. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise. If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

If You Have Questions, Call. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.

Keep Careful Records. It’s important that you keep copies of any correspondence and a log of any telephone calls with your tax records.

Get Expert Advice. If you dispute the IRS findings and need help in resolving the matter, get in touch with an attorney or certified public accountant who has a track record of success dealing with IRS audits.

Alan Olsen is Managing Partner, Greenstein, Rogoff Olsen & Co. LLP, CPAs. Alan is a former IRS auditor who now specializes in tax preparation and consulting for high-net-worth individuals. He has successfully represented some of the most successful entrepreneurs in the world in IRS audits. Read more at www.GROCO.com.