You’ve filed your tax return by now, right? Congratulations. Probably the last thing you want to hear about now is Internal Revenue Service audits.

However, it’s useful for all taxpayers — especially self-employed real estate professionals, to understand what the chances are of being audited. You may be surprised to discover that the odds that the average real estate professional will be audited are higher than those for corporations with millions of dollars of assets.

First of all, you may be happy to know that IRS audits are not nearly as common as they used to be. In 1963, an incredible 5.6 percent of all Americans had their tax returns audited. In 2010, only 0.9 percent of all Americans were audited. There are several reasons for the change:

• Between 1997 and 2006, the IRS workforce declined by 14 percent.
• The IRS workload increased.
• Starting in the mid-1990s, the IRS began to emphasize taxpayer service rather than enforcement.
• Congress enacted laws in 1998 to prevent perceived abuses by IRS agents and auditors. These new protections also made it more difficult for the IRS to go after tax cheats.

Partly as a result of these changes, the “tax gap” — the difference between what taxpayers owe and what they actually pay — has grown. The IRS estimates that the tax gap exceeds $300 billion per year. The IRS also claims that nearly one-third of the tax gap is due to underreporting of income by small businesses.

To help close the tax gap, the IRS has increased its compliance efforts in recent years. And it appears to be targeting small businesses. Indeed, audit rates for small businesses have gone up for the last five years. Since most real estate professionals run small businesses, they are affected more than most.

So, what are the odds that a real estate professional will be audited? It depends on your income and whether you’ve formed a business entity.

The vast majority of real estate professionals are sole proprietors. They run a one-person business and file Schedule C tax forms. In 2010, the audit rates for all sole proprietors were as follows:

Income less than $25,000	1.2% audit rate
$25,000 to $100,000	2.5% audit rate
$100,000 to $200,000	4.7% audit rate
More than $200,000	3.3% audit rate

If you’ve formed a partnership, limited liability company (LLC), or S corporation, the audit rates are much lower: In 2010, only 0.4 percent of all such business entities were audited.

The audit rates for regular C corporations were as follows:

Assets less than $250,000	0.8% audit rate
$250,000 to $1 million	1.4% audit rate
$1 million to $5 million	1.7% audit rate
$5 million to $10 million	3% audit rate

The data shows that sole proprietors are in the IRS’s crosshairs: In 2010, 4.7 percent of sole proprietors earning $100,000 to $200,000 were audited. Not even corporations with assets worth between $5 million to $10 million were audited as often.

In 2010, a total of 277,945 sole proprietors had their returns audited. This amounted to over 16 percent of all IRS audits for the year.

These statistics undoubtedly reflect the IRS’s belief that sole proprietors habitually underreport their income, take deductions to which they are not entitled, or otherwise cheat on their taxes.

Such audits can hurt. In 2010, the average recommended additional tax for an audit of a sole proprietor earning $25,000 to $100,000 was $8,776. For those earning $100,000 to $200,000, it was a whopping $31,979.

The lesson these numbers teach is that you need to take the IRS seriously. This doesn’t mean that you shouldn’t take all the deductions you’re legally entitled to take, but you should understand the rules and be able to back up the deductions you do take with proper records.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor,” and “Working with Independent Contractors.” He welcomes your questions for this weekly column.

 

Plato, Mo., does not usually make national headlines, though the U.S. Census Bureau has declared a spot 2.7 miles outside of town to be the absolute center of the nation’s population.

If all 308,745,538 million U.S. residents weighed the same, and stood where they resided on a life-sized map of the country in April 2010, the map would balance on a fulcrum at that spot in Missouri.

The fact that the new center of the nation’s population is 23.4 miles southwest of Edgar Springs, Mo., where it was for the 2000 Census, tells the story of a country whose population migrated to the South and West during the decade.

Recently released Census data show that the South’s population grew by 14.3 percent while the West’s grew by 13.8 percent, surpassing the population of the Midwest.

See related article: U.S. population growth slows

Here are a few recently released Census data points of interest:

Southern stars
The Lone Star State was a population magnet in the last decade. Texas grew by 4.3 million people, attracting even more than California, which was the 2000 Census’ leader after gaining 3.4 million.

Houston and Dallas-Fort Worth together accounted for more than half of the state’s population growth. San Antonio, Texas, had its own impressive growth statistic. It kicked Detroit off the list of 10 most populous places and replaced it as No. 7.

Florida was the No. 3 population gainer, Georgia No. 4, North Carolina No. 5, and Arizona No. 6.

Those six states, which were the only ones to gain more than a million people in the decade, accounted for more than half of the overall increase for the United States.

Western standouts
By percentage, rather than actual numbers, Nevada was the fastest growing state in the 10-year period, as it has been for the past five decades. It’s also the only state that has maintained a growth rate of 25 percent or more for the last three decades.

Almost all of Nevada’s growth was, no surprise, in the Las Vegas metro area, which accounted for nearly all the state’s population and almost 82 percent of its growth.

Midwestern malaise
While the Midwest’s decline is no secret, the Census numbers quantify the fall. For instance, Michigan was the only state that had a declining population in the decade, losing 0.6 percent.

South Dakota, which grew by 7.9 percent, was the fastest growing state in the Midwest, replacing Minnesota, which had been the fastest-growing state for the previous three decades.

Northeast holds its own
New Hampshire was the Northeast’s biggest percentage gainer for the fifth straight decade, growing 6.5 percent.

New York and New Jersey, however, posted the largest numeric gains in the Northeast, gaining 401,645 and 377,544 people, respectively.

Illinois and Indiana has the largest numeric increases in that region, with each gaining more than 400,000 new residents.

Suburban migration
Chicago was the only one of the 10 most populous places in the country to lose population, its head count falling by 200,418, 6.9 percent, in the decade. Cook County as a whole fared slightly better, losing 3.4 percent of its residents.

The suburbs, no doubt, absorbed some of those souls. Kendall County, Ill., for instance, 40 miles outside of Chicago, grew 110.4 percent, gaining 60,192 people in the decade. The greater Chicago-area metropolitan statistical area (MSA) also grew 4 percent, gaining 362,789.

Some other counties in the Midwestern metro areas also grew by 50 percent or more, even as their more urban neighbors grew more slowly or declined. These included Delaware County, Ohio, outside of Columbus; Hamilton County, Ind., outside of Indianapolis; and Dallas County, Iowa, outside of Des Moines.

Washington, D.C., was interesting in the fact that both the metro area and the suburbs grew during the decade. D.C.’s population grew for the first time since the 1940s, five censuses ago, climbing by 5.2 percent. Meanwhile, Loudoun County, Va., a D.C. suburb, was the fifth fastest growing county in the nation, growing by 84.1 percent in 10 years.