WASHINGTON — Worried the Internal Revenue Service might target you for an audit? You probably should be if you own a small business in one of the wealthy suburbs of Los Angeles.
You might also be wary if you’re a small-business owner in one of dozens of communities near San Francisco, Houston, Atlanta or the District of Columbia.
A new study by the National Taxpayer Advocate used confidential IRS data to show large clusters of potential tax cheats in these five metropolitan areas. The IRS uses the information to target taxpayers for audits. None of the 350 clusters was in Colorado.
The taxpayer advocate, Nina Olsen, runs an independent office within the IRS. She got access to the data as part of an effort to learn more about why some taxpayers are more likely to cheat than others.
The study also looked at tax compliance in different industries, and found that people who own construction companies or real estate rental firms may be more likely to fudge their taxes than business owners in other fields.
Many of the communities identified by the study are very wealthy, including Beverly Hills and Newport Beach in California. Others are more middle class, such as New Carrollton, Md., a Washington suburb, and College Park, Ga., home to a section of Atlanta’s massive airport.
The IRS audits only about 1 percent of tax returns each year, so the agency tries to pick returns that are most likely to yield additional tax money.
The IRS will not say much about how agents choose their targets. But as millions of procrastinators scramble to meet Monday’s deadline to file their taxes, the agency is running every tax return through a confidential computer program to determine the chances of collecting more money from an audit.
Each tax return is assigned a score. The higher your score, the more likely you are to get audited because, according to the IRS, the more likely you are cheating on your taxes.
How do you get a high score? The IRS won’t say, but veteran tax preparers and former IRS workers believe they have a pretty good idea.
“If you’re reporting $8,000 of charitable contributions when you’re only making $50,000, that’s a red flag,” said Bob Meighan, vice president of TurboTax, an online tax preparation service.
Who gets audited?
The IRS audits about 1 percent of individual tax returns each year. But the more money you make, the more likely you are to get audited. A look at which returns were audited in the 2012 budget year:
Individual returns filed in the previous year: 143 million
Audited by mail: 1.1 million
Audited in person: 360,000
Audit rate: 1 percent.
Individual returns with incomes above $200,000: 4.8 million
Audited by mail: 109,000
Audited in person: 70,000
Audit rate: 3.7 percent
Individual returns with incomes above $1 million: 337,000
Audited by mail: 23,000
Audited in person: 18,000.
Audit rate: 12.1 percent
Source: IRS enforcement
