This year, the IRS is targeting wealthy small business owners specifically in New Carrollton, Md., College Park, Ga., Beverly Hills, Calif., and Newport Beach, Calif. – suburbs that are home to wealthy and middle-class Americans, many of which are sole proprietors.
“It’s just a matter of them going where they think the money’s at,” Steve Rosansky, president and CEO of the Newport Beach Chamber of Commerce, told AP. “I guess if I were running the IRS I’d probably do the same thing.”
Only one per cent of tax payers get audited each year by the IRS. According to a study conducted by the National Taxpayer Advocate, the five regions chosen are most likely to have tax cheats than other areas. Among the industries said to cheat the most on their tax returns are construction companies and real-estate firms.
The study looked at tax cheat clusters from 2009; the IRS denies that a tax payer’s zip code or employment standing determines their probability for an audit, regardless of the results from the study.
“The IRS initiates audits based on information the taxpayer includes, or doesn’t include, on a tax return,” the agency told AL.com. “We don’t base audits on geography. City or state location plays no role in the audit process whatsoever.”
The data from the study suggests that audits were more likely to occur in specific regions and target small business owners, even though the IRS denies using geographic information to determine where to audit.
The Discriminate Inventory Function (DIF) is a program that the IRS uses to run all of its tax returns through. Higher scores point to a higher possibility for the IRS to gather more money from conducting an audit.
“If your return is selected because of a high score under the DIF system, the potential is high that an examination of your return will result in a change to your income tax liability,” states an IRS publication, according to AP.
To avoid an audit, small business should try avoiding reporting large charitable contributions or hefty home-office expenses.
The Internal Revenue Service conducts audits to minimize the “tax gap”, which equates to what the agency is owed and what is actually collected. The tax gap was found to be the largest among small business owners.