Attention Taxpayers: Your Chances of Getting Audited Have Fallen Significantly

KEY POINTS

• The IRS audited roughly 1 out of every 220 individual taxpayers last year. A decade ago, those odds were closer to 1 in 90.
  
• The drop in audits correlates to budget and personnel reductions at the tax agency.
  
• Wealthy Americans are much more likely to be audited than low- and middle-income taxpayers.
  

As the adage goes, the only sure things in life are death and taxes.

But tax audits are another thing entirely. 

A taxpayer’s chances of getting audited by the IRS have fallen significantly over the past decade. 

The agency audited 0.45% of individual tax returns in fiscal 2019, which ran through Sept. 30, 2019. That figure is down from 0.59% in 2018, and down by more than half from what it was in 2010, when 1.11% of taxpayers were audited.

In other words, roughly 1 out of every 220 taxpayers were audited last year. A decade ago, those odds were closer to 1 in 90. 

The dip in audits over the past decade is largely due to budget and personnel reductions over that time period. 

The IRS budget of $11.4 billion in 2018 was about 20% less than it was in 2010, when adjusted for inflation, according to the Congressional Budget Office. 

Since 2010 — the year the IRS had its biggest budget over the past two decades — the agency’s largest budget cuts have been in funding for enforcement, which includes audits, the CBO said. 

The IRS also said in a report published that the agency lost nearly 30,000 full-time job positions, including among enforcement personnel, between fiscal 2010 and 2019. The IRS employed about 78,000 people last year. 

The losses “directly correlate” with the steady decline in the number of individual audits over that time period, according to the report. 

And, compounding problems, the IRS expects 31% of its current workforce to retire within the next five years. 

Very few people get audited.

The odds of being audited are greater for wealthier Americans than low- and middle-income taxpayers. 

For example, the IRS audited 0.54% of tax returns in 2018 for individuals with an adjusted gross income between $50,000 and $75,000. However, it examined 6.66% of returns filed by those with income over $10 million, according to agency data. 

There are certain red flags that could increase the odds the IRS will come knocking.

For example, taxpayers commonly misreport certain income, such as dividend income or distributions from an individual retirement account, on their 1040 tax forms, Rosenthal said.

Because third parties have increasingly been reporting this information to the IRS as well as to taxpayers, any inconsistencies are a surefire way to get audited, according to Rosenthal.

If the IRS catches a mistake during an audit, a taxpayer will owe interest, depending on the when the tax was due and when the tax was ultimately paid, Rosenthal said. 

There’s also an accuracy-related penalty of 20% on an underpayment of tax due to negligence or disregard of rules. The penalty for fraud is 75% of an underpayment. There are additional penalties for undisclosed financial accounts and tax shelters, for example, he said.

(Source:  AICPA – CPA Letter Daily – CNBC – January 9, 2020)