Your Odds of Being Audited by the IRS
Tax season is officially over, but the Internal Revenue Service may not be finished with you.
There is always the chance that the IRS will audit your returns.
The good news for taxpayers, however, is that the odds of getting audited are at their lowest level since 2002. With budget cuts reducing IRS enforcement employees by a third since 2010, audits have declined for six straight years.
At its peak enforcement in 2010, the IRS audited one in 90 individual returns. That represents 1.11% of individual tax returns. In 2017, one in 160 (0.62%) individual returns were audited.
High earners are the most likely to be audited, but the percentage has dropped significantly. Last year, the IRS audited 4.37% of returns of households with income of $1 million or higher. In comparison, the IRS audited 9.55% of these high earners in 2015.
If you make less than $200,000, the chance of getting audited has dropped from 0.76% in 2015 to 0.59% in 2017.
The audit numbers don’t include the routine IRS requests to explain discrepancies between information in a tax return and documents provided by third parties such as financial institutions. For example, a taxpayer may not have reported realized capital gains, but the brokerage firm did. Or a freelancer may not have reported a payment that he or she received, but the payer reported the payment to the IRS.
Here are some red flags that can attract the IRS’s attention:
Failing to report all taxable income.
Large business expenses.
Large charitable deductions.
Excessive itemized deductions.
Previous tax problems or audits.
Self-employed people using Schedule C.
Claiming rental losses.
Taking an alimony deduction.
Claiming 100% business use of a vehicle.
If you get audited, here are some things to know:
You’ll be notified by letter.
The IRS will not initially contact you by phone or email. If someone, purporting to be with the IRS, contacts you that way, it’s a scam. The IRS will notify you of an audit by letter.
If the IRS is contacting you about a minor issue, address it and send documentation as soon as possible.
While an IRS audit sounds ominous, the vast majority are so-called correspondence audits. That means the IRS is just requesting documentation, making some sort of adjustment to a return or correcting a math error.
Know the audit window.
Generally, the IRS can audit returns filed in the past three years. Consequently, you should maintain all your tax records for at least three years. There is no set time for how long an audit may last.