Keep Your Audit Fears in Check

Posted on 05. Jun, 2017 by in Bookkeeping Articles, Services, Small Business Tips, Tax Updates

Getting audited by the IRS is no fun. Fortunately, your chances of being audited are probably lower than you think. A look at the latest IRS statistics for 2016 reveals some interesting, and reassuring, facts about the risk of an IRS audit.
Bullet Point Audits are becoming less common. The number of individual tax returns the IRS audited fell to a 12-year low last year, to just above 1 million. Audits have been declining especially steeply over the last five years, which the IRS commissioner said was due in part to declining budgets and a smaller IRS workforce.
Bullet Point Audits target the rich. It’s a fact: IRS audits happen most often to the super-rich. The statistical chance of being audited increases dramatically for people at higher income levels.
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For example, filers that made near the average U.S. income only had a 0.4 percent chance to be audited. That frequency doubled once annual incomes reached $200,000, and doubled again at incomes greater than $500,000. By the time a person reports $10 million in income, they have a one-in-five chance to be audited, according to IRS statistics.
Bullet Point Bad math gets you audited. High income isn’t the only thing that gets you audited, however. Often when people do their returns themselves, they make calculation errors. The IRS sent out more than 1.6 million examination letters last year correcting math errors, with the most frequent errors occurring in people’s calculation of their amount of tax due, as well as the number of exemptions and deductions they claim. Getting professional help can save you a lot of hassle.
Bullet Point Missing information creates a problem. Keep in mind that missing or incomplete data on your return also triggers an audit, since the IRS usually gets a copy of the same tax forms (W-2s/1099s) you get every year.
Bullet Point Standing out gets you audited. The IRS takes a close look at business expenses, charitable donations and high-value itemized deductions. They have statistical data on what amounts are typical for various professions and income levels. If your return stands out from what is “normal,” it may be flagged for review by the agency’s computer system.
Bullet Point More audits are done by mail. If you do face an audit, it’s most likely that it will be done by mail. Only about one in four IRS audits are field audits conducted in person by an IRS agent. The most common issues, such as math errors or missing data, are done through mail correspondence.
Bullet Point Most audits end up costing you. You can fight the tax law, but the tax law usually wins. Most people audited by the IRS end up owing additional tax. Only 11 percent of correspondence audits and 8 percent of field audits concluded with a “no change” finding in favor of the taxpayer.

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