The percentage of affluent Americans who get audited by the IRS each year is relatively low. According to data from the IRS, in 2020, only around 0.5% of all individual tax returns were audited. This figure includes both in-person audits, where the taxpayer is required to meet with an IRS agent, and correspondence audits, which are conducted by mail.
However, the audit rate for affluent taxpayers like wealthy business owners tends to be higher than for taxpayers with lower incomes. For example, in 2020, the audit rate for taxpayers with income over $1 million was around 3%, while the audit rate for taxpayers with income between $200,000 and $1 million was around 1%.
There are a number of red flags that can trigger IRS audits of wealthy business owners, including:
- Large or unusual deductions: Claiming large or unusual deductions on your tax return can be a red flag for the IRS, as it may indicate an attempt to reduce tax liability through questionable means.
- Inconsistencies in income or expenses: Inconsistencies in income or expenses, such as significant fluctuations from year to year or discrepancies between different tax forms, can also trigger IRS audits.
- Non-compliance with tax laws: Failing to comply with tax laws, such as failing to report all income or improperly claiming deductions, can also be a red flag for the IRS.
- Self-employment or business income: Individuals who are self-employed or have business income may be more likely to be audited, as the IRS may be more vigilant in ensuring that these taxpayers are accurately reporting their income and expenses.
- High net worth: Finally, high-net-worth individuals may be more likely to be audited, as the IRS may be more interested in ensuring that these taxpayers are paying their fair share of taxes.
It is important to note that being flagged for an audit does not necessarily mean that a taxpayer has done anything wrong. However, it is important to be prepared and to cooperate fully with the audit process in order to minimize any potential penalties or fines.
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