The idea of getting audited can cause panic and anxiety for most of us. The least invasive form, known as the correspondence audit, is simply a letter from the IRS asking for support documents or explanations to back up deductions you have claimed on a tax return. You respond to a correspondence audit with the applicable documents by fax or mail. More serious audits require an individual or their representative, typically the CPA or attorney, to meet in person with an IRS auditor. These more in-depth audits might cover multiple years and/or a larger part or all of your tax return.
The good news is that the chance of getting audited by the IRS has rarely been so low. According to the Internal Revenue Service, there was a 16% drop in audits, 40% drop in levies, and a 9% drop in liens for 2016 compared to 2015. Over 1 million individual tax returns were audited by the IRS in 2016, the lowest rate in more than a decade. In other words, only 0.7% of individuals were audited last year, either in person or by mail. The last time so few people were audited was 2004. The good news extends to corporate audits. They were down by 17% last year, with only 0.49% of corporations selected for examination. The IRS collected $1.8 trillion of individual income tax and $3.3 trillion overall if you include corporate taxes, estate taxes, etc. Over all the IRS refunded over $426 billion to overpaid taxpayers.
Why was there a drop in audits for 2016? The IRS claims to have improved its live telephone assistance by 40% over the prior year which helped taxpayers submit more accurate returns. 25.5 million calls is the number the IRS claims they fielded in live telephone assistance. Let’s not forget, budget, personnel and funding cuts are also a large factor behind the drop in IRS audits. Currently, 80,000 people work at the IRS, a decrease of 17,000 employees since 2010. The IRS budget was $12.2 billion in 2010 and has dropped to $11.2 billion in 2016.
Even though the chance of an audit is lower than it’s been in years you shouldn’t slack off on keeping good tax records. As expected, the higher your income, the greater your chance of being audited. Why? The IRS believes the more money you make, the more complex your tax return, the better chance they have of finding errors and as a result, collecting a higher amount of tax than if they audited a low or middle income taxpayer. To prove the point, the IRS audited 1.7% of returns that reported more than $200,000 in gross income and 5.8% or returns that reported more than $1 million in gross income. No matter what your income, having good support documents is important as is filing an accurate return. While an audit can be painful, a “no change” result is always the goal and having good documentation is key.
For more information about whether you’re at risk of being audited contact your LSL Advisor.