What are Your Chances of an IRS Audit?
Your chances of winning the California Lottery are about 1 in 19 million. That’s 0.0005% Your chances of winning the IRS audit lottery are slightly better – about 1.1%
Certain taxpayers are more likely than others to get an IRS “love letter” in the mail. The IRS recently released statistics on audit activity for the fiscal year ended September 30, 2011. The wealthiest Americans (those with more than $1 million of income) are the most likely individuals to get audited. About one in eight of the annual millionaires can expect to hear from Uncle Sam’s right-hand man.
At number two on the list of most likely to get audited are individuals reporting business income. The IRS statistics stratify the businesses into four groups by their gross receipts: Under $25,000; $25,000 to $100,000; $100,000 to $200,000; and over $200,000. It would seem logical that the tax returns showing more gross receipts are more likely to get audited. That logic holds true for the first three groups, but not for the last. Below is a table that shows the percentage of returns examined in each of the four groups. Interestingly, the businesses with gross receipts over $200,000 are slightly less likely to get a visit from the IRS than those with gross receipts from $100,000 to $200,000.
Here are the audit percentages for the last four years.
| Income Group | 2008 | 2009 | 2010 | 2011 |
| Individuals Income > $1 million | 5.8% | 6.4% | 8.4% | 12.5% |
| Business Gross Receipts $100K – $200K | 3.8% | 4.2% | 4.7% | 4.3% |
| Business Gross Receipts > $200K | 3.1% | 3.2% | 3.3% | 0.6% |
| Business Gross Receipts $25K – $100K | 1.9% | 1.9% | 2.5% | 2.9% |
| Business Gross Receipts < $25K | 1.2% | 1.1% | 1.2% | 1.3% |
After reviewing these percentages the next question to ask is, “What type of tax returns are least likely to get audited?” The IRS does not audit farm returns as much as they audit other businesses. Over the last four years farm returns have averaged an audit rate of less than 0.5%. Faring even better than the farmers have been the Small Business Corporations that file form 1120S. Only 0.4% of the S corporations filed were examined in the fiscal year ending September 30, 2011. By far the least likely to get an audit letter were the estate and trust tax returns. The audit rate on estates and trusts in the latest statistical release shows a paltry 0.1% of all Form 1041 tax returns being audited.
There is a lot of speculation about how the IRS selects tax returns for examination. The formula that the IRS uses to pick returns for audit is a highly-guarded secret. Many people pontificate about “red flags” they believe increase your chances of an audit. But their theories are purely speculation.
When the IRS selects an income tax return for examination there is a high probability that there is an error on the return. If your return is selected for examination by a local IRS office or field agent there is about a 90% chance they will propose additional taxes. How much? The average additional tax recommended for field examinations in the last statistical study was $15,187. How might you fare with a correspondence audit? Correspondence audits over the last four years have resulted in additional recommended tax averaging about $7,500.
Representing clients in IRS examinations is a specialty niche in the tax profession. Not only does the representative need to be technically proficient in working with the tax code, they must understand the IRS audit process and the internal workings of the agency. Seid & Company, CPAs have successfully represented individuals and businesses in both correspondence and field examinations. Please contact our office if you would like more information on the representation services offered by Seid & Company, CPAs.