Even the thought of a tax audit can cause panic and anxiety. The correspondence audit, the mildest form of the Internal Revenue Service (IRS) procedure, is one in which a few tax records are questioned by the IRS and a request is made for documents to be mailed in. More in-depth audits require you to meet in person with an IRS auditor, either at a government office or your own. These more-serious audits might cover multiple years and/or sections of your tax returns. Random audits are just like they sound – arbitrary – and could cover any section of your return; however, they generally focus on areas that might require you to pay more tax. (For more, see How Do IRS Audits Work?)
What Are Your Chances of a Tax Audit?
A recent CNBC.com article states that your chance of being audited by the IRS is at the lowest level in recent years. The number of Americans audited last year continued a six-year decline, with only around 1,000,000 individuals selected.
Between 2015 and 2016 the number of people audited dropped by 16%. In other words, only 0.7% of individuals were audited last year. Furthermore, it’s been 12 years since so few people were audited, and over that time U.S. population has expanded by approximately 30 million people.
Why the Decline in IRS Audits?
As you might expect, budget, personnel and funding cuts are behind the drop in the frequency of IRS audits. In 2010 the IRS budget was $12.2 billion; in 2016 funding had dropped to $11.2 billion, a full $1 billion less. Currently, 80,000 people work at the IRS, a decrease of 17,000 employees since 2010. This includes 7,000 fewer enforcement agents.
Consumers’ low chance of being audited has already resulted in lower tax revenues from auditing fines Last year, Commissioner John Kiskinen reported that audit declines had cost the government at least $2 billion in revenue that would otherwise have been collected between 2010 and 2015.
Who Is at the Greatest Risk of Being Audited?
As you might expect, the higher your income, the greater your chance of being audited. If you have more money, the government assumes that it will have a better likelihood of finding an error in its favor. (For more, see Surviving the IRS Audit.)
In 2016 IRS representatives audited 5.8% of the returns of those who reported more than $1 million in income. For individuals with more than $200,000 in income, only 1.7% were audited. Although the percentages were higher for these groups than for lower-income earners, they were reduced from previous years.
If you’re in a high-income group, it’s wise to keep meticulous records. That way, if you are among the small percentage summoned for an audit, you’ll be prepared to respond. Additionally, for any type of audit other than a correspondence check, it’s wise to call in your accountant – or consider hiring one.
What About Corporate Audits?
Corporate audits are at their lowest levels in a decade, down by 17% last year, when only 0.49% of corporations were investigated. Congressional Republicans began cutting IRS funding in 2010. Given the Trump administration’s “low regulation” environment, don’t expect a reversal. Tack on the fact that President Trump regularly cites tax audits as a reason for withholding his returns from the public, and you can pretty much assume that he won’t be enthusiastic about giving the IRS additional resources.
The Bottom Line
The chance of an audit, for you or your company, is lower than it’s been in years, but that doesn’t mean you should skirt the law or stop keeping tax records. What it does suggest is that can worry less about the possibility of being audited. Your risk is minimal in 2017. (For advice on making it even more minimal, see Avoid an Audit: 6 ‘Red Flags’ You Should Know.)