You're living the good life. Sitting by the pool under the palm trees and then ... blam! You're socked with an audit letter from the IRS.
Why you? There are some interesting variations in the likelihood of an audit depending on where you live. Check this out, you may sleep better tonight.
Folks with the $100,000 plus incomes in Los Angeles were at least six times more likely to get audited than taxpayers with the same income in New Jersey. The IRS audited 4.5 percent of the $100,000 plus returns in Los Angeles but less than 1 percent in New Jersey.
And getting audited in Los Angeles costs more money, too. Nationwide, the over $100,000 crowd was billed, on average, an additional $19,667 in taxes and penalties, but in Los Angeles that turned into $35,448 after the audit.
All these numbers are for face-to-face audits and don't include simple IRS letter audits seeking added payment. The statistics were compiled and available from Syracuse University, Transactional Records Access Clearinghouse, and based on Treasury Department numbers. They represent the tax year 1996, the latest available figures.
Let's compare Los Angeles to a few other spots around the country. The over $100,000 income crowd in Brooklyn was hit for an added $12,000 in taxes and penalties after an audit, but in the Indiana area it dropped to less than $9,000. The hip Manhattan crowd was nicked for an added $31,000, almost as much as folks in Georgia who paid nearly $32,000. But what's up in the Rocky Mountains? These taxpayers forked over almost $40,000 on average after an audit.
So how does this happen? There are several reasons a tax return is selected for audit. The most common is called the "DIF score," which in IRS-speak is a computerized mathematical formula that kicks out returns when they exceed IRS tolerances in specific areas.
The DIF score works by setting a range of expected tax claims within a specific category for a certain income, like the amount of charitable deductions claimed. Exceed the IRS DIF score and the more points you rack up the more likely an audit.
Can you find out these scores? Good luck. The IRS guards the DIF ranges closer than Fort Knox guards the gold.
If you fall outside the range your return may pop up on an auditor's desk with questions. They may be able to resolve the question in a letter or they make ask you to come in for an audit to check it out.
Those types of selections accounted for more than 34 percent of the IRS's traditional audits in 1996. The second most likely way to win the audit lottery is have your return related to another return that is already being audited. That accounted for nearly 24 percent of the audits, according to Syracuse TRAC study.
People who simply fail to file any tax return at all triggered one in five of all the audits, or just over 20 percent. The rest were a hodge-podge of reasons from the 7 percent audited because the IRS was conducting a study into some aea of suspected tax abuse or the person who prepared your return was audited and that meant customers were too. That accounted for just over 4 percent of the cases. Believe it or not, taxpayers requested audits in 1.6 percent of the cases.
The actual likelihood of being audited is still pretty slim and getting less likely all the time. Just 1.7 percent of the tax returns in the over-$100,000 income range was audited nationwide in 1996. That's roughly 76,000 returns.
The numbers have been falling for years. Total face-to-face audits of all income levels have dropped from 1.5 percent in 1981 to .8 percent in 1996. But the less stressful IRS service center letter audits have skyrocketed to 1.2 percent, up from barely .15 percent in 1981.
In the Rocky Mountain region with the whopping audit bills, the in-office audits amounted to just 2,500 tax returns and in Los Angeles about 6,700. Meanwhile, New Jersey had little more than 1,800 returns audited in that category and even crowded Manhattan only had 2,400.
Although there are more than 115 million individual tax returns filed every year, only about 800,000 face-to-face audits take place. The less rigorous service center letter audits hit 1.2 million in 1996.
But the IRS service centers, which process the tax returns, did issue a lot of bills for penalties (22 million) and for underpaid tax based on matching your return with documents filed by employers, banks and brokerage firms (3.2 million).
Taxpayers with delinquent accounts got 5 million bills and the levies, liens and seizures of assets to pay taxes accounted for nearly 4 million IRS contacts in 1996.
So this April, don't worry, be happy.
Written By Pam MacLean, CBS MarketWatch