We sometimes see questions asking if an individual’s tax return is likely to be audited.
While there is an extremely small chance that anybody’s return could be selected for audit randomly, the chance that any return is audited for any reason is less than 1 in 200 overall as of late. (For the self-employed, it’s a bit higher, at about 1 in 100.) And those numbers include returns for people not very much like a typical taxpayer, so typical return audit percentages are much smaller than even these numbers suggest.
Key things to be aware of:
- First, an audit has a specific meaning, wherein the IRS asks for details, looking more deeply into your financial situation and records to validate what you filed in your tax return. Just getting a letter from the IRS doesn’t mean you are being audited. Almost all questions about your return are handled by the IRS using non-invasive correspondence (e.g. CP-2000 letters) as opposed to generating an audit. (Even if you are audited, most audits are still handled by correspondence.)
- Making a minor error or omission is very unlikely to generate an audit. The IRS uses audits to collect revenue, and spending thousands of dollars in staff time to see if your $500 deduction was legitimate is not a good use of their audit resources.
- The situations that are most likely to generate audits these days are either returns with very large deductions or tax credits, e.g. EITC for households that don’t seem to match what they should be getting, or returns with very high reported income, starting at $500,000 annually. The chance of getting audited goes up to 1 in 16 for returns reporting at least $10M in income.
- You may have heard tales about how certain types of situations are instant audit red flags, e.g. home office deductions (only allowable for the self-employed these days.) You can even find articles, like this one: clark.com/personal-finance-credit/red-flags-will-get-you-audited-irs/ That’s not usually how it works. The IRS looks for anomalies that suggest someone is engaging in some sort of unallowable tax avoidance, either by underreporting income or taking unallowable deductions, but individual line items are not generally triggers in isolation.
If you are still curious what an audit entails, these articles describes the process; first, from the IRS perspective (ignore that it is from the self-employed part of the website): www.irs.gov/businesses/small-businesses-self-employed/irs-audits
Secondly, here’s an overview of the whole process from the perspective of a taxpayer: www.policygenius.com/taxes/how-an-irs-audit-works/
In the vast majority of cases, even if there is a minor issue, you are still not the droid they are looking for.
Disclaimer: This is a guest post and it doesn’t necessarily represent the views of IWB.