IRS Audit Statistics – What are the Odds?

July 2012

While the stress of “tax time” and its burden of organizing your paperwork, crunching the numbers and meeting deadlines comes and goes when a tax return is filed, some taxpayers move on to the fear of having all that work challenged by the Internal Revenue Service in an audit.  Our clients often ask what their chances are of being selected for audit, and the appropriate answer is that it depends.  One sure way to generate an inquiry (if not an audit, at least a notice) is to report something inappropriately that the IRS can quickly verify by other means.  Income from a W-2 or Form 1099 is a good example.  Unusually large deductions have been known to trigger examinations, as have amended returns.  However, in the absence of such things, some returns are simply picked at random, but the percentages vary based on things such as gross income.  The purpose of this article is to share some statistics from the most recently produced (2011) IRS Data Book, which provides numerous statistics regarding filings, examinations and collections for the most recent year.  That 84-page document may be found here:  http://www.irs.gov/pub/irs-soi/11databk.pdf.

First, here are some statistics showing the percentage of returns filed by taxpayers in 2010 that were audited at various income levels.  Note that business and individual returns are combined below, and that a “field audit” is conducted in person, while a “correspondence audit” is conducted by mail.

Audits of Taxpayers earning less than $200,000

Returns Filed: 136,149,315
Field Audits: 300,627
Correspondence Audits: 1,076,221
Percentage of Returns Audited: 1.01%

Audits of Taxpayers earning between $200,000 and $1,000,000

Returns Filed: 4,158,121
Field Audits: 57,917
Correspondence Audits: 80,515
Percentage of Returns Audited: 3.33%

Audits of Taxpayers earning more than $1,000,000

Returns Filed: 291,831
Field Audits: 20,475
Correspondence Audits: 15,947
Percentage of Returns Audited: 12.48%

Audits on International Taxpayers (regardless of income level)

Returns Filed: 238,232
Field Audits: 12,602
Correspondence Audits: 386
Percentage of Returns Audited: 5.45%

What does this tell us?  As one might expect, the more money you earn, the greater the odds are that you will face an audit.  For most taxpayers (those earning less than $200,000), the odds of being audited are near the 1% mark.  Those odds will increase threefold if you earn between $200,000 and $1,000,000.  You are nearly 12.5 times more likely to face an audit if you are fortunate enough to hit the $1,000,000 income level or higher.  Around 5% of international taxpayers underwent an audit during 2011.

The chart below shows audit rates at more detailed income levels, based again on returns filed in 2010, but looking this time solely at individual returns:

As this chart points out, the odds for most taxpayers are relatively low, and the odds generally increase as income escalates.  Interestingly, though, taxpayers showing no adjusted gross income at all are somewhat more likely to be audited than those who report income between $200,000 and $500,000, and taxpayers earning less than $25,000 are more likely to be audited than those earning as much as $200,000.  (Although other factors may explain this, the presence of the Earned Income Credit, available at lower income levels, appears to increase the odds of audit rather dramatically.)

Some other random observations:  A whopping 18% of all estate tax returns filed in 2010 was audited in 2011.  The size of the taxable estate greatly influenced the percentage, with over 40% of gross estates exceeding $10,000,000 being audited!  Just over 1% of gift tax returns filed in that same period were audited.

Conclusion

The relatively low percentages shown for some income levels do not guarantee you will avoid an audit indefinitely.  The IRS chooses some returns at random, but many others are selected because they contain “red flags” such as disproportionately high itemized deductions, returns that show no positive income at all, or readily-identified errors.  The statistics seemingly imply, then, that for taxpayers at any given income level in the charts above who do not file returns with errors or other red flags, the statistics must be somewhat lower.  The best advice is to be organized and thoroughly examine (and retain) your documents each year while completing your return.  Hopefully that will enable you to avoid an audit.

If you would like to discuss further, please call your BNN advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.