Good news on the tax audit front for most taxpayers, but bad news on the penalty front.

The IRS trend of auditing fewer & fewer tax returns continued last year with an enormous leap forward. The IRS audited only 900,000 returns out of a total of 150 million individual tax returns filed. That amounts to only 0.06%. In 2011, they audited 12.3% of returns. Let’s face it. That’s not very many audits. That’s good news.

The IRS has been shifting its focus for raising funds from tax audits to penalties & fees for the last several years. As the audit rate had dropped, IRS penalties have become noticeably more expensive. It started with penalties of hundreds of thousands or millions of dollars for failure to report foreign assets. 1099’s have become a cesspool of penalties. But the most noticeable result is the declining audit rate for most taxpayers.

Nobody that we prepare tax returns for needs to worry about a tax audit anyway. In the first place, we absolutely won’t help anyone cheat. Life is too short for both of us to play that game. In the second place, we’ve never had a bad result in a tax audit. Sometimes, there is a disagreement on an audit, and we have to fight. (We absolutely will.) Sometimes, we have to push the issue all the way to the courthouse steps. But, so far, the IRS has always capitulated. Once they capitulated in the hallway in front of the court room. That was a case of a very disagreeable appeals agent.

Some people think the strategies we use are a little risky. Let me disabuse you of that impression. We don’t go anywhere near the dreaded gray areas. We stay right smack dab in the middle of the tax code. Everything we do is completely litigated. But we are not afraid of doing things that are not commonly done by privately owned businesses and their owners. In fact, most of the things we do fall into that category. Multinationals are subject to the same tax code you are subject to. We can do anything they do and many things that are impossible for them to do. Privately owned businesses like you are sitting in the sweet spot. Within reason, the sky is the limit. Unfortunately, it’s been my experience that most tax practitioners spend all their time & effort on preparing your tax return. We spend a good deal of our time trying to find ways to cut your tax, legally.

Here’s a couple of charts to clarify things.

From the New York Times, here’s the trend. Trending down.