Are you audit bait?

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Dear Taxpayer, Some of the information that you provided to us does not agree with the information we received from other sources. -- The Internal Revenue Service

You've just joined an elite club, one where the initiation is an Internal Revenue Service tax return audit. Unfortunately, you can't refuse membership -- and the dues could be astronomical.

Since enactment in 1998 of the IRS Reform and Restructuring Act, with its focus on taxpayer rights vs. collection activities, the number of audits -- or examinations, as the agency prefers to call them -- has dropped dramatically. The year the kinder, gentler IRS came into being, about 1 of every 79 tax returns was audited.

Today's tax scofflaws have a better chance of escaping IRS notice. Although the total number of individual audits in fiscal year 2004 exceeded one million for the first time since 1999, most people still escape IRS examination; in 2004 almost 128 million returns were filed, making the chances of any single filer getting audited still quite slim. Even when cheaters were caught, a study by the Treasury Inspector General for Tax Administration found that the creative filers faced little risk when they disregarded tax penalties.

Statistical remoteness of an audit, however, doesn't matter if you're one of the unlucky few asked to bring your tax paperwork in for a review.

And it isn't necessarily well-to-do filers who need to look over their shoulders. True, wealthier taxpayers do tend to have more complex returns that invite IRS inspection, but poorer taxpayers aren't ignored by auditors. A key examination trigger for lower-income filers is an equally complicated tax provision: the earned income credit. Mistakes made in claiming this tax break often prompt second looks by the IRS.

A few years ago, the tax agency decided to spread scrutiny around by reviving its random, line-by-line audits, which took an up-close-and-personal look at almost 50,000 returns. The IRS says this effort helped it gather information to better target future cheaters. The agency also continues to look at paid preparers who push the tax-break envelope a bit too far.

But tax officials acknowledge that the number of audits isn't likely to rise significantly until it gets more money for tax enforcement efforts. President Bush's 2006 budget seeks an additional $500 million for IRS audit activities, a 7.8 percent increase over his last funding request.

"Enforcement more than pays for itself," IRS Commissioner Mark W. Everson said in support of the budget request. "Particularly in a period of deficit reduction, funding IRS enforcement is a wise investment." Secretary of the Treasury John Snow also lauded the call for more IRS funds, saying "Americans who play by the rules and pay their taxes deserve confidence that others pay their fair share as well. Increasing enforcement not only catches tax cheats, but discourages others from avoiding paying their taxes."

But while the IRS waits for Congress to come up with the money to add extra tax examiners, the agency depends upon the eagle eyes of the auditors it already has in place. And the chances of your return catching IRS eyes are greater if, in your zeal to cut your tax bill, your 1040 sends the wrong message.