If you make a lot of money, there is a good chance you’ll be audited sooner or later but not so much the case for the average taxpayer. Audit risk is not something average taxpayers need to worry much about. Taxpayers with the highest incomes should pay attention to their audit risk.
For 2015, the IRS audited 0.84% of individual income tax returns. If, starting in 2015, you live to file tax returns for 119 years, and the audit odds are consistent throughout your future lifetime, chances are your return will be pulled for audit once every 119 years, or once in your lifetime. That’s less than 1%. This is the lowest audit rate in many years.
The IRS has been struggling to fulfill its mission since congress cut its budget and over 5,000 agents and collectors have left the agency.
Even fewer returns are being examined in 2016. I expect that the IRS will audit even fewer returns in 2017. There seems to be no political appetite for reversal of this trend.
However, not all taxpayers enjoy these “average” odds in the audit selection process.
Some returns are more susceptible to audit scrutiny than others.
The IRS loses hundreds of millions of dollars every year on fraudulent refund claims based on earned income credits. Claiming an earned income tax credit raised your odds of an audit in 2015 to 1.75%. Claiming this credit more than doubles your chances of being audited.
Reporting over $25,000 gross receipts from a small business on Schedule C pushes your audit rate up to over 2%.
Taxpayers with income over $200,000 were audited at a 2.61% rate, but those with incomes over $1 million were audited 9.55% of the time.
34.69% of individual income taxpayers earning over $10 million were audited in 2015.
The IRS audits a higher proportion of returns claiming higher-than-average deductions, especially large deductions for gifts to charity, business meals and entertainment, losses from a hobby (reported as a small business) and rental losses. Claiming 100% business use for a passenger vehicle is another audit red flag.
For 2015, the IRS audited 0.6% of business income tax returns.Partnerships and corporations were audited 0.5% and 0.4% of the time. The audit rate for corporations having more than $1 million in assets was about 11%.
Working with an experienced tax professional is advisable if any of these factors is regularly present in your tax returns. Over the years, the extra cost of having an experienced CPA prepare your tax returns and advise you about keeping good records is usually a cost effective trade-off against the time, money and grief you’ll incur if you are selected for an audit you aren’t prepared for. Preparer awareness of audit risk factors helps to lower audit risk and reduce audit costs through better record keeping. If you have good records and are following all the rules an audit is only an inconvenience.
– Mark S Gleason CPA