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Beware new audits against high earners

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in Small Business Tax

Looks like you'll pay for the financial sins of Martha Stewart and the rest of her corporate-scandal cohorts.

Reason: IRS audit rates are slowly rising after bottoming out in 2000. (See 3/8/04 issue.) Just-released IRS statistics from fiscal 2003 confirm this trend, but they show the biggest increase coming in audits against people with incomes above $100,000. The audit rate for those higher-income taxpayers rose to 1.06 percent last year, up from 0.86 percent in 2002. That's still historically low (that rate hit 3.21 percent in 1996), but the IRS promises it'll shoot higher.

"Audit rates are still too low. We need to do more to increase it, particularly on the big income area," said IRS commissioner Mark Everson. "People have seen others get away with things they shouldn't have been able to; they've seen the corporate scandals."

Overall, 0.65 percent of all individual taxpayers—roughly 1 in 150—were audited in fiscal 2003, the highest level since 1999, but still well below the 1.67 percent rate of 1995.

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