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, one which requires a great deal of energy and effort to navigate successfully. Consequently, one of the most common questions taxpayers have regarding audits is – given my particular facts and circumstances, what is the probability of receiving an IRS audit? Every CPA has heard some variation of this question many, many times, and though it’s easily understandable why any taxpayer would ask such a question, every CPA knows that IRS audit probability is difficult to pin down without fully taking account of all the relevant factors. Each tax return is unique and carries its own particular set of risks, and so 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, however, there are a few general principles which can be extracted to help us get a sense of audit probability in most cases. As we’ve discussed in previous posts, there are five common reasons for an IRS tax audit. In this post, though, we’ll take a look at the statistics on IRS audit probability and 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, your risk of receiving an IRS audit is quite low, but there are things you can do to further reduce your 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 were as follows: for those individuals making less than $200,000 with no Schedule C or E, approximately 0.4% of returns were audited; for those with incomes below $200,000 but with Schedule C or E below $25,000, 1.2% received an audit; 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 could be dis-aggregated further to provide for 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%. For corporate entities with assets above $10 million, the rate jumped 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 prepared flawlessly, because otherwise 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 from these facts is that the overall likelihood of receiving an audit is strikingly low. Simply put, if you’re an individual with no Schedule C or E and an income below $200,000, you have a higher probability of dying in a car accident at some point in your life than receiving an audit! 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.
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, if your return is filled with mistakes, you shouldn’t be surprised if an audit comes comes your way. 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 one of our top New York tax attorneys will provide you with the counsel you need.