It is the most dreaded letter a taxpayer can receive.

Dear Taxpayer,
Some of the information that you provided to us does not agree with the information we received from other sources. -- The Internal Revenue Service

You've just joined an elite club, one whose initiation ritual is an IRS audit. Unfortunately, you can't refuse membership -- and the dues could be astronomical.

When the IRS Reform and Restructuring Act was enacted in 1998, lawmakers ordered the agency to focus more on taxpayer rights instead of collection activities. Not surprisingly, the number of audits -- or examinations, as the agency prefers to call them -- dropped dramatically.

The first year of the kinder, gentler IRS, about 1 of every 79 tax returns was audited. By 2003, it was even easier for tax scofflaws; that year, according to IRS data, only 1 of every 150 individual taxpayers was audited.

But the tax times, they are a-changing.

More audit attention
The number of audits in 2005 was the highest since 1998, just before the agency's operational structure was realigned. The trend is continuing. During fiscal year 2006 (from Oct. 1, 2005, through Sept. 30, 2006) IRS figures show that the agency completed more than 1.28 million audits of individuals, up slightly from the 1.25 million scrutinized the year before.

That sounds like a lot and the IRS is pleased that its agents are catching more incorrect returns. But overall, the examination rate of individual returns in 2006 was just under 1 percent, statistically the same as in fiscal 2005.

Don't breathe easy just yet. If your tax return included a Schedule C detailing any self-employment income, you are three times more likely to face IRS questions. And the IRS says it will be stepping up audits of filers who run their own unincorporated businesses.

Since this type of income has no verification mechanism (i.e., the IRS can't double check much of it in the way it can verify wage income via an employer-issued W-2), tax officials believe that many self-employed individuals underreport their income. The IRS also is keeping an eye out for potential scams that show up on returns.

Crackdown to continue
You can count on the tax-cheat crackdown to continue.

Washington, D.C., lawmakers, who once demanded the IRS give taxpayers the benefit of the doubt, are applauding the new aggressive approach. The reason? Members of Congress are hoping that enhanced enforcement efforts will help close the $345 billion tax gap. That represents, based on 2001 figures, the difference between what taxpayers should have paid and what they actually paid. Without some help from additional IRS collections, Capitol Hill faces the prospect of raising taxes.

In March, IRS Commissioner Mark Everson reassured Congress about enforcement efforts. He told the Ways and Means Oversight Subcommittee during its annual look into IRS operations that the agency is committed to continued audits. In particular, Everson said, the IRS will continue to look closely at returns from wealthier taxpayers, particularly filers with incomes of more than $1 million.