Update: For recent information abotu IRS audits view IRS Statute of Limitations:How Far Back Can the IRS Audit You?
The following article is from Forbes Magazine
After much worry and angst you successfully met the filing deadline for your tax return. Now you are obsessing about a new worry: Will that return be audited by the IRS? Almost everyone dreads the thought of an IRS audit but thanks to continuing Congressional cuts in the IRS budget, fewer and fewer Americans will face an audit of their return. For the 83% of Americans who fully comply with our tax laws that is good news. Or is it? 17% of Americans are not fully compliant with our laws and for the noncompliant the reduced chances of an IRS audit is even better news. Guess who makes up the revenue needs of our government when some people fail to comply? You guessed it, the 83% of us who fully comply with our tax laws make up for the shortfall caused by our less honorable fellow Americans.
2015 IRS Data Book
The 2015 IRS Data Book was recently released and gives us clues as to the low level of audit activity by the IRS. In 2015 the IRS only managed to audit .8% of individual tax returns. That exam level is much lower than it was in 2010 when it stood at 1.1%. There have been reductions in exams across the board for individuals, businesses, and corporations. The IRS has fewer agents and examiners to review returns and that has resulted in a dramatic reduction in the rates of audits for all taxpayers.
Even with the current low rate of IRS exams, certain taxpayers face a much higher chance of being selected. Among the self-employed the rate of exam is more than double that for individual returns overall. The rate for those filing a Schedule C with their tax returns was between 2% and 2.5%, varying based upon the level of gross receipts of the business. The reason for the higher rate of exam for self-employed returns: the IRS National Research Program has shown they are much more likely to under report income or overstate deductions than returns from taxpayers who receive a paycheck and a Form W-2. That is why self-employed returns receive much more scrutiny. Even though farmers are self-employed, few are chosen for audit. In 2015 the IRS only pulled .3% of Schedule F filers for examination.
Low Income Taxpayers
Another group that receives an elevated level of scrutiny from the IRS are taxpayers earning less than $25,000 who claim the earned income tax credit. The IRS audits about 1.7% of that group. IRS research has shown a higher error rate on those low income returns. Some believe the lower compliance rate is in small measure caused by dishonest tax return preparers who improperly inflate refunds on low income returns as a way to attract more clients.
On the opposite side of the spectrum are high income individuals. Taxpayers earning between $200,000 and one million dollars had a 1.8% chance of facing an exam in 2015. The IRS has yet to release statistics for taxpayers making more than $1 million but 2014 statistics show that the more you exceed $1 million in income the higher your risk of an up close and personal encounter with an IRS agent. The 2014 statistics show the following:
|Income||Returns Examined 2014|
|$500,000 under $1,000,000||3.62%|
|$1,000,000 under $5,000,000||6.21%|
|$5,000,000 under $10,000,000||10.53%|
|$10,000,000 or more||16.22%|
The IRS exam rate was higher for corporations at 1.3% overall. Only .9% of small corporations were forced to support their returns but 11.1% of large corporations were subject to review by IRS. Corporations with assets exceeding $20 billion had an examination rate of 64%.
Estate and Gift Tax Returns
The IRS audits 7.8% of estate tax returns. The rate of exam increases with the value of the estate. In 2015 the rates of exam were as follows:
|Size of Gross Estate||% Examined|
|Under $5 million||2.1%|
|$5 million to $10 million||16.2%|
|$10 million or more||31.6%|
Very few gift tax returns were reviewed by the IRS. The exam rate was .9%
Partnerships and S Corporations Get a Pass
Two types of returns where the IRS has clearly dropped the ball is in the exam rate of S corporations and partnership returns. It only audited .4% and .5% respectively of those returns. As a practitioner who has represented taxpayers for many decades, I can assure that just because a businessperson incorporates or forms a partnership their level of honesty does not suddenly rise. I have found that S corporations and partnership engage in the same types of noncompliant behaviors as sole proprietorships. There is no justification for the exam rates for sole proprietorships to be 5 times that for S corporations and partnerships.
Congress Must Like Tax Cheats
Congress has chosen to empower the least compliant taxpayers at the expense of compliant taxpayers. Each year since 2010 Congress has cut the IRS enforcement budget with a resultant reduction in the examination rate. The revenue from IRS examinations has dropped by about 10 times the savings from budget cuts. The cuts have resulted in a net loss of over $5 billion in 2015. Compliant taxpayers meanwhile continue to pay their proper taxes while those who game the system have the security of knowing that the IRS is unlikely to catch on to their game.