If being selected for an IRS audit were a game show, it’d be called the Wheel of Misfortune.
Though the IRS in 2016 audited about one million individual tax returns, it represented only about 0.7% of all returns filed. That’s a 16% drop from a year earlier and means there was about a one in 140 chance that when the IRS wheel spun its audit wheel it landed on your name. That’s down from about one in 120 returns audited in 2015.
Corporate audits in 2016 fell to 1.1% from 1.3% a year earlier. Overall, it was the sixth straight year the number of audits declined. Budget reductions at the IRS are blamed for reduced enforcement. Critics contend that years of inadequate IRS appropriates are leading to the decline in audits and thus perhaps emboldening tax cheats.
IRS critics contend that the IRS had become politicized; for example, the much-publicized IRS targeting of conservative organizations. After an investigation, Assistant Attorney General Peter Kadzik, in a letter to Congress saying that no charges would be filed against anyone involved in the scandal, explaining that what was discovered was,
"substantial evidence of mismanagement, poor judgment and institutional inertia leading to the belief by many tax-exempt applicants that the IRS targeted them based on their political viewpoints. But poor management is not a crime."
While poor management may not be a crime, it’s not a confidence-builder, either.
Audits tend to be dollar-figure driven. The higher an individual’s income, the greater the possibility of an audit. Income levels of more than $1 million a year saw audit possibilities approach 6%, the Wall Street Journal reported on March 26, 2017. Incomes above $200,000 saw a 1.7% chance of being audited. Under $200,000 the figure declined to 0.6%. If your income is above $10 million, there’s about a one-in-three chance you’ll be subject to an audit.
The more complicated a person’s tax return, the more it raises the likelihood of an audit. As a person’s income increases their various financial instruments, shelters, investments, deductions, and other factors tend to become more complex – and more attractive to IRS auditors.
Suspicion of unreported income; questionable deductions; foreign income or accounts; appearance of unreported income; and other maybe-this-doesn’t-pass-the-smell-test factors bring the IRS bloodhounds sniffing at a person’s income paper trail.
Corporations stand a much higher chance of being audited, and again, the higher the income, the higher the probability of an audit because of the amount of money involved. Also, as with high-income individual taxpayers, corporate tax returns tend to be very complicated, which again leads to greater scrutiny.
Regardless of the numerical factors impacting the number of IRS audits, everyone – individuals and corporations – should conduct their affairs is if tomorrow they’ll receive notice of an audit.
Obeying financial laws and keeping good records for your own protection is common sense. That doesn’t mean regardless of your tax position that you and the IRS are going to agree on everything either through an audit or because your tax return was flagged for some reason.
The IRS doesn’t always prevail in tax disputes. And it’s possible, the faces behind the acronym being human, for IRS employees to make mistakes. Thus, keeping good records and not becoming overly “creative” in your financial reporting guard against IRS problems.
Another reason to always be audit-ready is that when the IRS Wheel of Misfortune spins, it will land on someone’s name. Betting it won’t be you is a gamble.