What is the Likelihood of Being Selected for a Tax Audit?

Needless to say, no one wants to be chosen for a tax audit by the Internal Revenue Service (IRS). But is our collective fear of auditing justified by statistics? Or is it simply the result of media fearmongering? How many audits does the IRS actually conduct, and what are your odds of being counted among the unlucky few? With audit season in high gear, our IRS tax audit attorneys probe the statistics to answer these questions and uncover the likelihood of being chosen for an IRS audit. Unfortunately, you might not like the findings.

What Are the Statistical Odds of Being Chosen for an IRS Tax Audit?

According to the 2017 IRS Data Book, which covers data from October 1, 2016 to September 30, 2017, fewer than 1% of all tax returns from this period were selected for audit: 933,785 out of 149,919,416, which is approximately 0.6% of the federal income tax returns that were filed last year. To phrase the data another way, the average audit risk is 1 in 160.

This figure represents a slight decline from previous years. In 2016, the national audit rate was closer to 0.7%, with 1,034,955 returns selected among 147,964,324 filed in total. The rate was higher still in 2015, when 1,228,117 out of 146,861,217 returns were chosen, or about 0.84%.

That being said, the “average” audit rate isn’t necessarily reflective of each taxpayer’s individual odds – which, for many people, are considerably higher. As regular readers may remember from our article on common reasons for tax audits, one of the statistical factors that influence your individual likelihood of being audited is your adjusted gross income (AGI).

In that article, which discussed statistics from the 2015 IRS Data Book, we noted the Tax Foundation’s findings of audit rates of approximately 35% in households earning over $10 million, 19.4% in households earning $5 million to $10 million, 8.4% in households earning $1 million to $5 million, and 3.8% in households reporting no AGI (compared to, for instance, a rate of under 0.5% for households earning $50,000 to $75,000). The publication of the 2017 Data Book allows us to update these figures and see how they have shifted over time, as follows:

• No AGI reported – 2.55% of returns in this income range were audited
• $1 to $24,999 – 0.71%
• $25,000 to $49,999 – 0.49%
• $50,000 to $74,999 – 0.48%
• $75,000 to $99,999 – 0.45%
• $100,000 to $199,999 – 0.47%
• $200,000 to $499,999 – 0.70%
• $500,000 to $999,999 – 1.56%
• $1 million to $4,999,999 – 3.52%
• $5 million to $9,999,999 – 7.95%
• $10 million or higher – 14.52%

(To view the source of this data, navigate to page 27 of the 2017 Data Book linked above, and refer to Table 9b, Examination Coverage: Individual Income Tax Returns Examined, by Size of Adjusted Gross Income, Fiscal Year 2017.)

As you can see, households earning $25,000 to $199,999 share virtually identical risk, while the likelihood of auditing increases sharply for households below or above those thresholds – particularly for those reporting no AGI or reporting income upwards of $500,000.

Certain types of audits also have a greater likelihood of occurring than others. According to the 2017 Data Book, among the approximately 1.1 million audits conducted, about 70.8% were correspondence audits (which are conducted via mail “correspondence”), while 29.2% were field audits (performed “in the field,” i.e. the taxpayer’s home and/or business). Note that the 2017 Data Book does not distinguish statistically between field and office audits (which are conducted at IRS offices), simply describing the former to mean “face-to-face” auditing.

IRS Ranks Most Common Mathematical Errors on Tax Returns

The Data Book also noted the most common types of mathematical errors on tax returns, creating an image of which tax preparation issues are most statistically likely to lead to audits. These errors included:

1. Tax calculation errors – 1,021,834 errors (40.7%)
2. Exemption number/amount errors – 417,683
3. Standard deduction/itemized deduction errors – 221,110
4. Earned Income Tax Credit (EITC) errors – 200,643
5. Child Tax Credit errors – 126,319
6. Adjusted gross/taxable income errors – 99,244
7. First-Time Homebuyer Credit repayment errors – 73,902
8. Refund/amount owed errors – 71,092
9. Education credit errors – 68,135
10. Income adjustment errors – 45,550
11. Filing status errors – 43,603
12. Withholding or excess Social Security payment errors – 42,714
13. “Other” – 40,843
14. Errors involving other types of tax credits – 39,282

(To view this data, scroll to page 37, Table 15, Math Errors on Individual Income Tax Returns, by Type of Error, Fiscal Year 2017.)

California IRS Tax Audit and Appeals Representation

Some audits had positive outcomes, resulting in additional refunds for nearly 34,000 taxpayers. However, for another 24,000 taxpayers, audits resulted in disputes over the proposed assessment of additional taxes – an outcome which is especially likely following a field or office audit. In addition to the assessment of additional tax, audits also confront taxpayers with the risk of costly interest – and if the error was serious, even a set of civil penalties. Worst of all is the possibility that the auditor will detect “badges” (indicators) of tax fraud, potentially leading to an IRS criminal investigation for tax evasion or related offenses.

If you are concerned about an upcoming audit, intend to dispute the results of an audit, wish to dispute the results of an IRS audit appeal, or believe you are at the center of a criminal tax investigation, make sure you have skilled guidance from an experienced tax lawyer. At the Tax Law Office of David W. Klasing, our accomplished team features IRS tax lawyers, criminal tax defense attorneys, tax litigation attorneys, and IRS appeals attorneys, enabling us to build a strategic defense of your case. With over 20 years of experience, we are your trusted resource for efficient resolution of tax controversies in California and beyond. For a reduced-rate consultation concerning a tax audit or appeal, contact the Tax Law Office of David W. Klasing online or call today at (800) 681-1295.

For more information, visit: https://klasing-associates.com/tax-litigation/

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland  and Sacramento.

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