Tax Audits & Penalties:

For the 12 months ended Oct. 2005, the IRS received nearly 131.3 million individual income tax returns with tax payments of over $990 billion from individuals, according to the Internal Revenue Service Data Book 2004.

Of those returns, IRS revenue agents examined, or audited, about 1,216,000 returns. That's about one percent of all individual income tax returns filed during the year.

As these figures show, the IRS audits only a fraction of tax returns. Instead, it relies on statistical sampling, matching of statements from employers and financial institutions with individuals' statements, and other sources of public information to help identify returns for audit.

While the odds of being selected for an audit are small, it helps to keep good records and all receipts in the event you are selected for an audit. Your documents provide an audit trail that explains how you completed your tax return.

For more information on the IRS's examination process, see IRS Pub. 556.

If the IRS investigates your tax case and decides against you, you may seek to appeal the case. The first round of an appeal is likely to involve the IRS Appeals Office, which relies on an informal conference procedure. For more information on the appeals process and your rights, see IRS Pubs. 5 and 1660

You may also wish to review the IRS's collection process, found in IRS Pub. 594. This publication describes how the IRS will impose a tax lien on your property to secure a claim.

If the IRS's appeals office rules against you, you may appeal its ruling to the appropriate judicial court: U.S. Tax Court, U.S. Court of Federal Claims or U.S. District Court. For more information on the jurisdictions that each of these courts cover, see Pub. 5.