United States: What Are The Chances Of Getting Audited By The IRS?

Every year, the IRS audits roughly one percent of individual tax returns. However, your exact chance of getting audited depends strongly on your income level and on other individual factors.

How Does Income Affect Your Chance of Getting Audited?

Less than one percent of individuals who declare an adjusted gross income between $1 and $199,999 are audited by the IRS. Audit rates are much higher among individuals with incomes over $200,000, with more than 16 percent of returns declaring incomes of more than $10,000,000 being audited.

If you declare no adjusted gross income, your chances of getting audited are also higher than average. In 2014, the IRS audited just over five percent of these returns.

Of course, you shouldn't try to reduce your income to stay out of the gaze of the IRS. You just need to be aware that having a high income — or no gross adjusted income at all — increases your chance of hearing from the IRS.

What Else Increases Your Chance of Getting Audited?

The IRS looks for signs of dishonesty when deciding which tax returns to audit. Every 1099 and W-2 you receive goes to the IRS, so there is no point in trying to leave income off your tax return — the IRS will know.

High deductions increase your risk of being audited. Don't avoid making deductions that you are entitled to make, but be aware that you might have to justify them.

People who file by hand are more likely to be contacted by the IRS regarding their tax affairs. This could be because filing by hand opens up more opportunities to make errors on your tax forms, such as leaving a required field blank by mistake. If you decide to file by hand, double or triple-check your return to ensure it is error-free.

Self-employed people are more likely to face an audit. In particular, sole proprietors filing a Schedule C return are more likely to be audited than people running their companies as part of a partnership or multimember LLC. In addition, large corporations are more likely to be audited than small corporations.

Correspondence Audits and Field Audits

The IRS conducts two types of audits: correspondence audits, where you communicate with the IRS investigators in writing, and field audits, where you must have a face-to-face meeting with an auditor.

Most people find correspondence audits far less intimidating than field audits. All you need to do is respond to letters you receive from the IRS and provide all requested documentation. In 2014, 71 percent of all individual taxpayer audits were correspondence audits.

If you run a business, you are more likely to face a field audit. In 2014, 92 percent of C corporation audits, 91 percent of S corporation audits and 67 percent of partnership audits were field audits. In this kind of audit, you are required to meet an auditor in your home, at your business premises or in a local IRS office. You have the alternative of sending your tax professional in your place if you prefer.

What to Do If You Receive a Letter from the IRS or an Agent Comes Knocking at Your Door

If you receive a letter notifying you that you've been chosen for an audit, don't panic. Unless you intentionally set out to deceive the IRS, it's unlikely that you will be in serious trouble. However, it is advisable that you do not meet with the IRS alone. Hire a qualified professional who can respond to the notice, especially if it arrives certified return receipt. Failure to respond can get you in severe trouble. If the officer arrives at your home or place of business, you are under no obligation to speak to the IRS representative. Indicate that you are hiring someone to serve as your legal representative and all further contact should be directed to that individual. That representative should be a CPA or a lawyer experienced in dealing with the IRS. (See video: Four Rules when Dealing with the IRS)

In the interim, you should check which return the audit notice refers to. The IRS has up to three years to initiate an audit from the date when your return was due, so the letter you received could refer to a return other than the one you most recently submitted.

Next, check which items on your return the IRS wants to know more about. The letter you receive will usually let you know which records you need to provide to support the claims you made on your return. For example, if the IRS questions a charitable deduction on your return, you'll probably be asked to provide some record of having made the donation, such as a bank statement or a receipt from the charity.

If the IRS suspects that you have under reported your income, you may be asked to provide bank records. Gather together records for all your bank accounts for the period covered by the tax return.

Obviously, it's easier to understand what the problem is if you have your tax return in front of you. If you can't find your tax return, call the IRS office and ask for a copy. If you're missing records that you need to support your case, prepare to explain why you don't have them.

Conclusion

Dealing with an IRS audit is stressful and time-consuming. Hiring a qualified experienced CPA or attorney will give you peace-of-mind that your case is being handled in a timely, professional manner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.