IRS Audit - Not Very Likely

5/26/2011

By Mark Corey, CPA

There are very few things dreaded more by Americans that an IRS audit. Even the word “audit” instills fear in taxpayers to the point that many pay more in tax than they are required just to avoid the possibility of an audit. Every year the IRS publishes data concerning the number and types of audits. This data is called the Data Book, and it is very revealing about not only the number of IRS audits, but the type of audits and the primary targets of these audits.

The latest Data Book is for all returns filed in calendar year 2008 and audited in 2009. The information can be found at http://www.irs.gov/pub/irs-soi/10databk.pdf.

Of the more than 142 million individual tax returns filed, a little over 1.5 million were audited, which works out to about a 1.1% rate. Of those, just under a third were returns that included the earned income credit, while returns with a Schedule C business or a Schedule F farm were audited at about 5% and under 1%, respectively. If you were a high income earner (without a business), your chances increased with your income so that taxpayers with income up to $1 million had about a 3% chance of audit, while those reporting over $1 million of income had about a 7% chance of audit.

Of all individual returns that were audited only about 21% were contacted by an IRS examiner. The remaining audits are what the IRS calls “correspondence audits” (or “letter audits”) where the taxpayer receives a letter from the IRS asking for additional information or substantiation for something that has come up in the IRS review process.

Not surprisingly, the audit rates for businesses also increased with the size of the business, but not necessarily with revenue. For example, a little over 1% of small corporations with assets under $1 million were audited, while about 17% of corporations with assets over $10 million were audited. If you happen to reach the lofty air of a corporation with $20 billion or more in assets your chance of audit was 98%.

For those taxpayers who were more unlucky, the IRS conducted almost 5,000 criminal investigations that resulted in about 3,000 prosecutions and about 2,200 convictions (of which about 81% were incarcerated).

The bottom line for most taxpayers is there is a slim chance of a face-to-face audit with the IRS. That being said, report your income and deductions accurately will prevent you from becoming a part of the 5,000 taxpayers investigated annually by the IRS for criminal activity.