The words “IRS audit” strike fear into the hearts of many taxpayers. We’ve all heard horror stories about “audits from Hell” that leave taxpayers exhausted and broke. To help scare people into filing, around tax time every year the IRS makes sure to publicize its audits of famous people. But what are the real odds of getting audited? Surprisingly low for most people.
Here’s a breakdown by income of the percentage of individual returns audited by the IRS in 2011:
Adjusted Gross Income Audit Rate
No adjusted gross income 3.42%
$1- $25,000 1.22%
over $10,000,000 29.93%
You can see from these statistics that the odds of a person who earns $25,000-$100,000 per year being audited are less than 1%. Oddly, people who make less than $25,000 have a higher audit rate. This is because many of these taxpayers claim the earned income tax credit and the IRS conducts many audits to ensure that the credit is not being claimed fraudulently.
In the past IRS audits were far more common. In 1963, an incredible 5.6% of all Americans had their tax returns audited. Everybody knew someone who had been audited. Jokes about IRS audits were a staple topic of nightclub comedians and cartoonists.
There are several reasons for the change:
•a decline in the IRS workforce
•an increase in workload. At the same time the IRS workforce was declining, its workload was increasing.
•a new emphasis on taxpayer service, rather than enforcement. Starting in the mid-1990s, the IRS began to emphasize taxpayer service rather than enforcement
•legal changes. 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.
According to the IRS Oversight Board, the IRS does not have the resources to pursue at least $30 billion worth of known taxes that are incorrectly reported or not paid. In 2005, the nation’s “tax gap”—the total inventory of taxes that are known and not paid—was estimated at $345 billion.
Does this mean you can always get away with cheating on your taxes? Absolutely not. The IRS uses sophisticated computer algorithms to decide on which returns to audit. If your return looks strange, your chances of being audited go way up. For example:
•returns with extremely large deductions in relation to income are more likely to be audited. For example, if your tax return shows that you earn $25,000, you are more likely to be audited if you claim $20,000 in deductions than if you claim $2,000
•certain types of deductions have long been thought to be hot buttons for the IRS—especially auto, travel, and entertainment expenses. Casualty losses and bad debt deductions may also increase your audit chances
•businesses that show losses are more likely to be audited, especially if the losses are recurring. The IRS may suspect that you must be making more money than you are reporting—otherwise, why would you stay in business?
•deductions that seem odd or out of character could increase your audit chances—for example, a plumber who deducts the cost of foreign travel might raise a few eyebrows at the IRS.
The IRS also takes great pains to ensure that you report all your income. Its computers match the information on employee Form W-2s (the wage and tax statement your employer gives you) and 1099-MISC forms issued to non-employees with the amount of income reported on tax returns using Social Security and other identifying numbers. Discrepancies usually generate audits.