Recent IRS Audit Statistics
On the whole, the chance of an audit of a person’s personal income tax return in any given year is low. This is true regardless of whether a person’s income is high or low. To be sure, this statement is a generality. But any discussion of IRS audit statistics necessarily starts with generalities and drills down from there.
As we add specific facts about a person’s return, the probability of an audit may not continue to be low. Individuals who use certain deductions, for instance, or who do not provide adequate substantiation, may have a high risk. But in general, it is true that audits are a rare event for most taxpayers. This is true for individuals, corporations and other taxpaying entities. In 2017, the most recent year we have information on, IRS audit statistics show fewer returns (as a percentage) being audited versus recent previous years. This is due, at least in part, to a reduced IRS budget.
In this post, we’d like to take a moment to look at the audit statistics for tax year 2017. As we examine the IRS audit statistics in detail, we will reinforce the general idea that audit probability is low for most taxpayers. We will also highlight the sort of things which can increase audit probability. Based on the data, it’s clear that higher income returns have a significantly greater chance of audit. This follows very straightforwardly from the government’s basic economic interests. Simply put, higher income returns have the potential to generate more funds for the IRS.
Total Individual Tax Return Audits
In fiscal year 2017, a total of 149,919,416 tax returns were filed with the IRS. That’s a bit less than half of the total U.S. population. And out of those millions and millions of tax returns filed, the IRS audited only 933,785 of them. That means that the IRS audited just 0.6% of all returns! As mentioned, this percentage is even lower than in recent previous years. For example, in 2016, the audit percentage was 0.7%, and in the two years before that the percentages were 0.84% (2015) and 0.85% (2014). Even though the audit percentage is only slightly higher for these years, it’s important to note that even a slight increase means many, many more audits. Even a fraction of 1% is very significant when the total number of returns filed is nearly 150 million.
Audit Rates Increase for Higher Income Returns
If we disaggregate the data by income, it’s easy to see the correlation between income and audit probability. There is a very straightforward relationship between higher income and a higher chance of audit. Let’s look at the data. For those who filed with a personal income between $100,000 to $199,999, just 0.47% of returns were audited. In other words, less than half of 1%. This figure will probably seem surprisingly low to most people. Taxpayers who earn within that range are already at a high percentile and live comfortably in most areas of the country.
Among those in the range of $200,000 to $499,999, only 0.70% of returns were audited. Again, this is startingly low considering that this is undoubtedly a high income level. Only 3.6% of all returns were in this income range. It’s only at the next income range where we see an audit percentage that first exceeds 1%. Still, there were audits of only 1.56% of returns in the $500,000 to $999,999 range.
One income range, though, has an audit percentage greater than 10%. And that applies to incomes above $10 million. The audit rate for those earning above $10 million in 2017 is 14.52%. In this income range, there is just a bit less than a 1 in 6 chance of an audit. If you think about how rare it would be to earn at that level, even a 14.52% audit rate is still fairly low.
Audit Rates are Highest for Large Corporations
Audits of corporations occur in very low percentages across the board. Small C corporations, S corporations, partnerships and sole proprietors were all audited at rates below 1%. Only large C corporations had an audit rate above 1%. In 2017, 77,709 large corporations filed tax returns. Of those only 6,109 were audited. This translates to an audit rate of just 7.9%. This is still quite low, particularly considering that many large corporations have very large revenues.
In the past, we’ve gone over a few of the deductions which can potentially increase audit risk. Though such deductions may indeed increase risk, clearly it is income level which correlates most closely with hightened audit risk. And again, this reflects a clear financial interest on the part of the government. Think about it: let’s suppose we have a small business which earned $100,000, and we have a large corporation which earned $20 million. Now, even though the large corporation may have a team of accountants and lawyers, it makes more sense for the IRS to audit the large business. The small business may very well have a less polished return, but the IRS has a financial motivation to focus on the large corporation.
Don’t Become a Statistic: Get Audit Help
In the future, we will come back and discuss audits and audit probability in greater detail. For now, though, it’s sufficient to keep in mind that the more income you earn, the greater your chance of an audit. And make no mistake, audits are highly obnoxious, stress-inducing events. Audits can have one positive side-effect though: they can catch tax problems before they become too big to solve. That’s something that Mackay, Caswell & Callahan, P.C., understands more than any other firm. If you have an audit related issue or back tax issue, contact us today so that we can help. One of our top New York City tax attorneys would be happy to assist you.
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