Wealth

Millionaires face 1 in 10 chance of being audited

If you make $1 million a year, the IRS is keeping a special eye on you.

A new report from the tax collection agency shows that nearly 1 in 10, or 9.55 percent, of returns filed with a reported income of $1 million or more were audited or examined in 2015.

That's up from 7.5 percent in 2014 and nearly double the rate of 2008. The following year, in 2009, the agency created a special group targeting the ultra-wealthy.

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According to the IRS data, millionaire earners were more than 12 times as likely to be audited than the rest of America. People earning $200,000 or less — in other words, 95 percent of tax filers — faced a 0.76 percent chance of being audited. Overall, less than 1 percent of tax filers, 0.84 percent, were audited.

Of course, many will find political reasons behind the IRS' top-heavy audits. But for the agency, going after the highest earnings also yields the highest returns per audit.

In 2009, the IRS created a special group targeting the super-rich, called the Global High Wealth Industry Group, staffed by experts in closely held companies, trust and estates law, and overseas accounts.

Tax attorneys say that after a four-year ramp-up, the group has gotten more aggressive. The IRS also has started highlighting the group to tax attorneys and wealthy taxpayers.

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So how do you avoid an audit if you're rich?

Here are five things tax experts suggest the wealthy can do to try to prevent being audited.

1. Avoid bad accountants. If your accountant has ever been involved with clients who have been investigated for tax fraud, or has a bad history with the IRS, steer clear. Of course, finding a full audit history of your accountant's clients is nearly impossible. But some accountants can give you a sense of their history with the IRS.

2. Don't use big round numbers. If your return is filled with lots of large, round numbers, the IRS might become suspicious of its validity — especially if those numbers pertain to deductions. Make sure all of the reported figures are as precise as possible.

3. Be wary of big changes in income. Wild swings in reported income from one year to the next are a red flag for the IRS. Some are unavoidable, such as a big, one-time capital gain. But consistency is key.

4. Watch for outliers. The IRS looks for numbers that are much larger or smaller than those for similar returns. If you have a huge deduction or itemization that's outside the normal bounds for your income group, that's a red flag.

5. Refrain from using the word "yacht." It sounds obvious. But accountants say that any return that contains the word "yacht" is almost guaranteed to be audited. The challenge, of course, is what to call the business expense for your 250-foot Feadship. Perhaps "waterborne executive office?"

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