Fluctuations of income, including sudden increases from stock compensation, can be a red flag triggering a dreaded audit by the IRS—especially now. The IRS Data Book has disclosed a large increase in audits among people whose adjusted gross income is over $500,000 per year, with a particularly big jump for those with income over $5 million. For taxpayers earning between $500,000 and $1 million yearly, the audit rate rose from 2.77% in 2009 to 3.37% in 2010. Annual incomes between $5 million and $10 million saw a 11.55% audit rate in 2010, up from 7.52% in 2009.
IRS audits are performed at three different levels, depending on the zeal of the investigation.
- Correspondence audits are conducted by mail and seek to verify deductions and credits that you have claimed on your tax return. The number of correspondence audits has risen by over 100% in recent years.
- Office examinations, held on IRS property, entail a meeting between you and IRS compliance officers to scrutinize your tax return.
- Field examinations, the most demanding (and uncomfortable) type of audit, involve a visit by IRS revenue agents to your office or home for a thorough analysis of information pertaining to individual and/or corporate tax returns.
Normally the IRS can perform audits only within a three-year statute of limitations that starts on the filing date of a tax return. However, in some circumstances the IRS can obtain a six-year statute of limitations for what it believes to be "substantial underreporting of income."
For more on IRS audits of both individuals and corporations, see the related FAQ on myStockOptions.com. For help in avoiding the types of tax mistakes that can draw the attention of the IRS, see the articles and FAQs in the Tax Center on myStockOptions.com and in the Taxes section of myNQDC.com.
Comments