2014 Top Stocks Market, Best Stocks Investment In 2014, Top Stocks For 2014: IRS Auditing More Big Earners

If your income is high, your chances of getting a visit from the Tax Man are on the rise -- and there isn't much you can do about it.

Last year, the Internal Revenue Service sharply increased face-to-face audits of upper-income taxpayers, according to data released Thursday. For taxpayers reporting income above $200,000, so-called field audits rose 34% in fiscal 2011 to 78,392, from 58,521 in fiscal 2010. (The IRS fiscal year begins on Oct. 1.)

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Field audits, which are conducted by an agent, are often more in-depth than "correspondence" audits, which are conducted by mail and sometimes involve a single issue. Overall, the agency audited 3.9% of taxpayers with income above $200,000, up from 3.1% in 2010.

The increase in field audits for taxpayers reporting income over $1 million, though smaller, was still significant: 24%, for a total of 20,475 in 2011, versus 16,509 in fiscal year 2010.

Overall, the agency audited 12.5% of taxpayers reporting income over $1 million, compared with 8.4% in 2010.

"We are looking more at taxpayers at these income levels because we find more issues there," says IRS Deputy Commissioner Steve Miller.

The IRS's new data include the revenue from its programs to combat offshore tax evasion by U.S. taxpayers with undeclared accounts, Mr. Miller says, but the report doesn't specifically break out the revenue raised by them. In 2009 and 2011, the agency held two limited amnesties tailored for those with such accounts.

David Gannaway, a principal with CitrinCooperman CPAs in New York, says most of the audit increase he has seen is related to the IRS's pursuit of revenue from undeclared offshore accounts. The agency is cross-checking data provided by Swiss banks with individual tax returns.

IRS agents then initiate what seems to be a regular audit, Mr. Gannaway says. "They ask only at the end whether there is an offshore account -- without disclosing that the IRS has records in hand," he says. The penalties for not disclosing offshore accounts are severe.

Certified public accountant Jonathan Horn, who practices in New York, has noted a jump in other audits for upper-income taxpayers as well. In one case involving a home-office deduction, he says, an IRS agent made a home visit.

In another case, involving rental real estate, the auditor compared the rents specified in leases with bank deposits to verify that all income was being reported.

Dennis Newman, a CPA with Sharrard, McGee in Greensbo! ro, N.C. , also saw a jump in face-to-face audits in 2011. Two areas of focus: investors' reporting of cost basis -- which is used to determine taxable gain or loss -- and "grouping" rules for determining passive losses for real-estate investments.

What can taxpayers do to avoid such audits? "There's not much," Mr. Horn says, "except not take deductions they're legally entitled to."

Like many tax preparers, he tells clients to keep detailed records. In one case last year, he says, the only tax due involved mileage deductions for which the client didn't have a log.

Audits of subchapter S returns, which are often filed by small businesses, also rose in 2011, up 13% over their 2010 level.

Overall, the IRS collected slightly less revenue from enforcement efforts in 2011, $55.2 billion versus $57.6 billion in 2010. Mr. Miller attributes the drop to anomalies, such as several large cases that were closed in 2010.

In 2011 the IRS recommended 1,622 tax-related criminal prosecutions, up 7% from the 2010 figure. The conviction rate was 93%, and the average sentence was 25 months.

Besides enforcement data, the IRS's release includes information about electronic filing of returns and taxpayer service. The percentage of e-filed returns rose to 77% in 2011, compared with 69% in 2010.

Overall, 94% of taxpayers said they were satisfied with the IRS's answers to toll-free calls, up slightly from the previous year.

But "level of service" ratings dropped to 70% from 74% in 2010, in part because the agency had fewer employees to answer phones. "Most who got through to us were satisfied, but fewer got through," Mr. Miller says.

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