The Stats on IRS Audit Probability
For many citizens, receiving an IRS audit ranks among the most terrifying possibilities they can imagine. An IRS audit is undeniably a very stressful ordeal. They require a great deal of energy and effort to navigate successfully. Consequently, one common audit questions from taxpayers is, given my facts and circumstances, what is the probability of an audit? Every CPA has heard some variation of this question many, many times. While it’s understandable why taxpayers ask such questions, every CPA knows that IRS audit probability is difficult to pin. That’s because probability shifts based on the relevant factors. Each tax return is unique and carries its own particular set of risks. Accordingly, there’s no way to give a fully accurate sense of someone’s probability without knowing every relevant piece of information.
While the above statements are true, there are a few general principles to help us understand audit probability. As we’ve discussed in previous posts, there are five common reasons for an IRS tax audit. In this post, though, we’ll look at the statistics on IRS audit probability. We’ll then examine some of the general points which seem to increase audit risk in general. For the purposes of this article, we’ll concentrate on the statistics for audits from the year 2012. As you’ll see, in nearly all cases, the risk of receiving an IRS audit is quite low. Nonetheless, there are always things you can do to further reduce your audit chances.
Breaking Down IRS Audit Statistics
The probability of receiving an audit depends in part on the type of return. For individuals, the statistics for the year 2012 are as follows. For those individuals making less than $200,000 with no Schedule C or E, approximately 0.4% of returns were audited. Those with incomes below $200,000 but with Schedule C or E below $25,000, received an audit 1.2% of the time. For those with incomes below $200,000 but with Schedule C or E above $100,000, the audit rate was 3.5%; for those with incomes above $200,000 but below $1 million, the rate was, surprisingly, slightly lower at 3.2%, and for those with incomes above $1 million, the IRS audit rate was 12.1%. This date can be further dis-aggregated. Doing so provides a more detailed account of audit probability, but these wide categories do well to paint a basic picture of what’s going on.
For corporate returns, the statistics are as follows: for those with assets under $1 million, the audit rate was 0.9%; for corporations with assets above $1 million but below $10 million, the rate was 2.1%. The rate for corporate entities with assets above $10 million, jumps to a whopping 17.2%. For pass through entities, i.e. partnerships and S corporations, the rate for all returns was just 0.5%.
IRS Audit Probability General Principles
Clearly, the most significant general principle which can be taken from these data is the tendency for larger returns to be audited at a higher rate. This isn’t exactly a spectacular IRS audit probability revelation, but it’s a point worth emphasizing. If you earn well, you need to make absolutely certain that your return is flawlessly prepared. Oherwise, there’s a decent chance you’ll be getting an audit from the taxman. Likewise, if you’re a corporation with substantial assets, you fall into the same scenario. The IRS is a pragmatic organism, it’s not going to waste time and resources pursuing returns which are likely to have very small liabilities. Even in a highly structured bureaucracy, the old phrase of “the juice has to be worth the squeeze” stands true.
Another basic conclusion that can be gleaned that the overall likelihood of receiving an audit is strikingly low. Simply put, if you don’t file Schedule C or E and have income below $200,000, you have a higher probability of dying in a car accident than being audited! IRS audits are certainly not fun, and you should never totally shut out the possibility of receiving one; but you should also remember that the chances are not stratospheric by any means.
Call Us in an Audit!
In any case, you should make certain that you exercise good diligence in checking off all the boxes and doing everything correctly when submitting your return. No matter how much you earn, when a return is filled with mistakes, audits are likely. If you do receive an audit, it’s in your best interest to consult with a tax attorney who can assist you as you navigate through the process, one that’s familiar with the documents the IRS auditor will expect, and can offer your a few tips on how to get through your audit. Contact Mackay, Caswell & Callahan, P.C. today and a top NYC tax attorney will provide you with the counsel you need.