Am I at Risk for an IRS Audit? Probably Not!

IRS Tax Audit Rates for Certain Taxpayers, 2012

Type of Tax Return
Audit Rate
No-change/refund rate
>$200,000, simple return
0.4%
21%
>$200,000, partnership income
1.1%
17.4%
$200,000-$1 million income*
2.8%
37.4%
$1 million and above*
12.1%
36.5%
Source: IRS Statistics of Income: Table 9b. Examination Coverage: Individual Income Tax Returns Examined, by Size of Adjusted Gross Income; Table 12. Examination Coverage: Returns Examined Resulting in Refunds, by Type and Size. *non-business

The Risks of an IRS Audit are Exaggerated for Most

As you sit down with your W-2 forms and 1099 forms this year to prepare your taxes or gather your receipts to send to your accountant, no doubt you’ve wondered, “how likely am I to be audited by the IRS?” You may even have obsessed about audit red flags. The answer, for most, is most people are not nearly as likely to be audited as some would have you believe.

No one wants to be audited by the Internal Revenue Service. It’s definitely a hassle. But recent IRS statistics show the likelihood that an average taxpayer will get audited and end up owing more in taxes is a lot lower than many people believe. Moreover, hysterical advertising that floods the airways as part of the 2014 tax filing season greatly exaggerate the danger and distorts people’s ability to rationally assess their risk.

If You Make Under $200,000, Don't Worry

Officially, the IRS audits about 1% of the 143.4 million individual tax returns filed by individuals every year. And statistics show that the richer the taxpayer, the more likely he or she is to be audited – the IRS audited 27.4% of tax returns reporting more than $10 million of income in fiscal year 2012, according to statistics.

But when it comes to ordinary folks, those who work for a living and have some modest savings and investments, the audit rate is much smaller than most people realize. According to IRS data, some 79.2 million individuals report less than $200,000 of income, don’t claim the Earned Income Tax Credit, take no deductions for employee business expenses and claim no income from partnerships or farming. These people constitute 55% of all individual filers and are by far the most common type of taxpayer.

Just under 309,000 of that 79.2 million are audited, a paltry 0.4% rate. Of those who are audited, just 36,415, or about 12%, ever meet face-to-face with an IRS taxman; the majority of these audits are done through the mail, frequently addressing minor issues such as forgetting to report interest from a bank account.

This Won't Hurt a Bit

That’s little solace for the unlucky few, of course. So here’s another statistic you might find surprising: One in five of those audits results in either no additional tax for the taxpayer or in nearly 13,000 cases, a tax refund. Overall, the IRS refunded nearly $1 billion to 54,000 audited individuals in 2012 (including those filing other types of tax returns).

To be sure, other types of taxpayers are at higher risk to be audited. There were about 15.2 million taxpayers who earned less than $200,000 but reported income from partnerships or sought deductions for employee-related expenses. They were nearly three times as likely to be audited as taxpayers who earned a similar amount without that source of income and those deductions. They were also slightly less likely to have no change or get a refund.

And, of course, the more you earn, the more likely you are to be audited. The IRS reported examining nearly 3% of all non-business tax returns reporting income between $200,000 and $1 million in fiscal 2012, although 37.4% of those examinations either yielded no change in tax due or a refund. And the audit rate quadruples to 12% for returns with positive income above $1 million. This group also had a sharply higher rate of no-change results and refunds, at 36.5%.

How to Dispute an IRS Audit

Looking for Tax in All the Wrong Places?

While it may sound counter-intuitive that the IRS generally doesn’t pick on the little guy as much as people would have you believe, the fact that so many audits result in no-change in taxes owed and sometimes even a refund for the taxpayers has prompted some criticism by watchdogs that oversee the agency.

In 2012, the Treasury Inspector General for Tax Administration reported that 62% of audits of so-called “S corporations,” which is a tax code category for some kinds of small business, generated no change in the amount of tax due. In this case, the businesses audited had less than $10 million in assets.

“These results are troubling because, according to the IRS, a high no-change percentage means the agency is spending a significant amount of resources on unproductive audits and burdening compliant taxpayers with unnecessary audits,” said J. Russell George, the IG.

© 2014 TaxNerd

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Weekend Reader 2 years ago

My own experience with individual returns (1040s) is that the IRS is very good at picking returns that look like they might be wrong. There is something unusual or excessive on them. But if the taxpayer has kept sufficient supporting documents, "unusual" may be perfectly correct.

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