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IRS increases its audits of higher-income taxpayers

WASHINGTON -- The IRS increased its audits of individuals and couples making more than $100,000 last year, focusing most of the extra attention on people making $250,000 or more.

Still, even high-income taxpayers faced low odds of being called upon to document their expenses and deductions. Despite the 24 percent increase for taxpayers who earned $100,000 or more, the IRS audited only one in 95 returns filed by big earners.

''If you look at overall audit rates, they're still too low," IRS commissioner Mark Everson said yesterday, adding that the statistics nevertheless show the agency has halted the decline that began in 1998, when Congress ordered the IRS to shift its focus from enforcement to taxpayer service.

Individuals at all income levels faced slightly higher chances of an audit last year. Overall, the IRS examined 1 in 153 returns last year, compared with 1 in 174 the previous year. The audit rate still lags from the rates in the mid-1990s when the agency looked at about 1 in 60 individual returns.

The statistics come as millions of Americans hurry to prepare their tax returns before the April 15 filing deadline.

In an effort to best use its money and manpower, the IRS has focused its search for unpaid taxes on high-income individuals, corporations, and income hidden in offshore accounts. The IRS reaped $35.5 billion through collection efforts last year, the most in a decade.

Audits of the nation's largest corporations, nevertheless, fell for the eighth consecutive year. About 12 percent of corporations with assets exceeding $10 million were audited, compared with more than 14 percent the year before. Audits for small and midsize businesses also dropped slightly.

Everson said the decline in corporate audits reflects the complexity of those tax returns. He promised the agency can reverse that trend if Congress honors its request for a 10 percent increase in its enforcement budget.

Joseph Bankman, a law and business professor at Stanford University, said an increased audit rate means little if the corporate examinations don't turn up hidden tax shelters. ''Does the IRS have the resources to find the shelter in a million-line return?" he asked. ''There's often advantage in being the one who hides something."

The IRS has asked for $393 million to add more than 5,000 employees to the enforcement staff. Everson said the budget fell short this year, but the agency chose to make small cuts across the board instead of making deep slices into the enforcement budget.

The report also showed the IRS uses its major collection tools -- levies, liens, and seizures -- more frequently but not as often as before the 1998 restructuring.

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