IRS Audit

IRS Audits are Lower than Ever!

15 Apr 2014

This April, as our children anxiously await the arrival of the Easter Bunny to stuff their baskets full of cavity-causing agents, one agent the average American will have an ever-lowering chance of encountering is the IRS agent.

Budget cuts and new responsibilities are straining the Internal Revenue Service’s ability to police tax returns.  Last year, the IRS audited 1% of all returns from individuals, the lowest rate since 2005. The number is predicted to go down even further this year. This information is all according to John Koskinen. Koskinen, the current IRS Commissioner, was appointed this past December to take over an agency already under siege.

Last year, the IRS acknowledged their agents improperly applied extra scrutiny to conservative groups who applied for tax-exempt status from 2010-2012. This led to five ongoing investigations, including three by congressional committees, and outraged lawmakers who control the agency’s budget. The animosity is reflected in the IRS budget, which has declined from $12.1 billion in 2010 to $11.3 billion in the current budget year.  Budget shortfalls are responsible for the IRS having fewer agents auditing tax returns, the lowest amount since the 1980’s. Obama has proposed a 10% increase to the IRS budget for the next year. Republicans haven’t been silent about their lack of support for the increase.

The IRS is also responsible for implementing large parts of President Obama’s health care law, including the mandate that most Americans get health insurance. Republicans in Congress are strongly opposed to the law, putting yet another target on the back of the IRS.

Your chances of being audited vary greatly, depending on your income. Only .09% of people making $200,000 were audited last year. That’s the lowest rate since the IRS began publishing the statistic in 2006. By contrast, 10.6% of people making $1 million or more were audited, the lowest since 2010. Only 0.6% of business returns were audited, but the rate varied greatly depending on the size of the business. About 16% of corporations with more than $10 million in assets were audited.

According to some tax professionals, the average American has a rather limited ability to take risks when it comes to filing their tax returns. Your employer reports your wages to the IRS, your bank reports interest income, your broker reports investment income and your lender reports the amount of interest you paid on your mortgage. Better technology is helping the IRS flag which returns to audit. If you report making $40,000 in wages and your employer tells the IRS you made $50,000, the agency’s computers probably will catch that. The same is true for investment income and many common deductions that are reported to the IRS by financial institutions. People who own their own business or are self-employed have a much greater opportunity to manipulate numbers on their returns, and the IRS knows that, too.

One flag for the IRS is when your deductions or expenses don’t match your income. For example, if you deduct $70,000 in real estate taxes and mortgage interest, but only report $100,000 in income.  A situation like this begs the question, “how are you living?” putting you in the sights of the IRS.

For now, until budget conditions improve, the IRS takes the position of going after the people who look like the worst of the bad guys. The IRS admits that there are going to be some people that they should catch, but who will end up falling through the cracks. So the majority of Americans can breathe a sigh of relief. There will be no letter with an IRS return address in our mailboxes.