Don't Fear the Auditor

Editor's note: As a special feature for March, TheStreet.com offers an ongoing series on everything you need to know about taxes. Today is part eight.

Anyone who has attended a dinner party or watched late-night talk shows during tax season has heard people joke about being audited. Everyone laughs politely, not because there's anything inherently amusing about tax fraud but because humor is an outlet through which a society contends with its anxieties.

The good news is that individual taxpayers do not get audited as commonly as it is assumed, and, except in extraordinary situations, the audit is nothing more than a calculation error, a forgotten signature or innocent confusion about complex tax regulations.

Still, certain people are significantly more likely to attract the attention of the IRS.

The agency has always had an audit bias toward high-income individuals and business-related deductions, says CPA Mark H. Misselbeck, tax principal at Levine, Katz, Nannis & Solomon in Needham, Mass.

"The perception from their projection of 'the tax gap' is that these are the groups most involved in generating that gap, outside of outright criminal activities."

Closing the Tax Gap

The most recent figures from a comprehensive four-year IRS study showed a tax gap -- the discrepancy between what taxpayers should pay and actually do pay on time -- of $345 billion in tax year 2001, a compliance rate of 83.7%.

Individual income tax accounted for more than 70% of the gap. Over four-fifths of that came from underreported income or inflated deductions and credits.