How Likely Are You to be Audited?

You might find yourself going to the mailbox one day, casually skimming through your mail when suddenly panic strikes... There's a letter from the IRS. People dread this more than they dread the filing of their tax return. Why? Because the tax code is a beast that many people don't understand. Our preference is to leave it to the experts.

As an Enrolled Agent, part of my job is to stay current on tax laws. Since summer is the slower season for tax professionals, many of us do our continuing education during that time. Over this past weekend, I took a particular course regarding the likelihood of an audit for taxpayers. The course used statistics and research based off the 2016 tax year to produce the relevant material.

Surprisingly, 3.25% of all returns filed in 2016 were recorded as under examination by the IRS because there was no adjusted gross income reported for that tax year. This could be for many different reasons, including only social security income, military combat pay, business loss, etc.

The percentage of returns audited drops below 1% of all returns filed until a taxpayer's adjusted gross income reaches $200k. As the adjusted gross income climbs so does the increased risk of an audit. Just over 2% of all returns filed in 2016 were examined when a taxpayer's adjusted gross income fell between $500k and $1 million.

In plain facts, one in every 143 individual returns filed in 2016 were examined. The chances are reduced to one in every 426 returns filed if the tax return filed did not include a Business or the Earned income tax credit.

If you're a business owner, you're in a red zone. Save any receipts you have and meticulously track your income, document your miles driven, keep track of your odometer readings, don't blend personal expenses with the business side. Keep business and personal accounts and expenses separate. The importance of documentation cannot be overemphasized. The more organized your income and expenses are, the better a possible audit will flow.

Some other common reasons why the IRS will further examine your tax return:

Making less money than the prior year:

The IRS really does track the fluctuation or consistency of a taxpayer's income. The historical record is tracked and compared each year an individual files and things trending outside the norm can be a red flag for further scrutiny.

Handwriting the tax return

Some of us enjoy exercising our math skills and would prefer to file our tax return by paper. You might want to rethink that because with all the technology making it easier to compute tax math, the IRS prefers electronically submitted tax returns. According to research, paper filed returns have a 21% higher error rate compared to less than 1% for electronically filed returns.

Random Audit

Of course, there is always the random selection audit. Basically, it is random but there is a system to it. They use a base formula generated by statistics and compare the types of tax returns filed with the base formula for returns of similar nature. The statistics are acquired through the National Research Program conducted by the IRS.

Being audited isn't the ideal situation for any taxpayer. It's time consuming, nerve racking, and tedious. The best way to avoid an audit is to be sure to have an accurately filed tax return. If you're not confident in your ability to rightly interpret the tax code, either play it safe with your deductions or go to an expert that can save you tax dollars.

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