IRS Audits: Are You Next?
We recently shared what you should do if you receive notification of a tax audit (and why you should never take on the IRS alone!). But have you ever wondered what the odds are of your return being audited? This is somewhat of a mystery to taxpayers and unfortunately there is no concrete answer. Audits are generally selected at random, but there are a few things that may flag your return for an audit. Here are some considerations to keep in mind:
Not All Notices Are Audits
Before you panic when you check the mail and find a letter from the IRS, know that not all notices are audit notices. Taxpayers often receive notices about information on tax returns that does not agree with government tax records. These are known as computer-generated CP2000 notices. They generally cover the data mismatches of income and deductions on your tax returns when compared to the data the IRS receives via W-2s, 1099s, and 1098s. Most importantly, CP2000 notices are NOT audits.
There are other types of notices requesting additional information to allow for a deduction or simply to verify reported data. These are also NOT audits. If you ever receive a notice from the IRS and you’re not sure what it means, contact your tax advisor right away.
Decreased Audit Rates
Overall, there has actually been a decrease in audit rates over the last few years. In 2018 there was a 7% drop in audit exam rates compared to 2017 for all tax returns.
The 2018 individual audit rate was just 0.59%, which means one out of every 170 returns filed was audited. 81% of those audits were correspondence exams and 19% were conducted in person at IRS offices or at the taxpayer’s business. In other words, only about one out of every 900 returns required in-person audit meetings.
There were also less business return audits in 2018. The C corporation exam rate was 0.9% and exam rates for both partnerships and S corporations was only 0.2%.
As the IRS audit staff is reduced, fewer audits are being performed. However, with the increased application of computer-assisted audits and reviews, we believe audits will continue for taxpayers that are at high risk.
Red Flags That Increase Your Audit Risk
There are many red flags that can increase your chance for an audit. Some are identified by IRS computer formulas while others are issue-focused compliance campaigns by IRS’s Large Business and International Divisions. Here are the most common audit triggers:
- Earned Income Credit (EIC)
- Sole proprietors (Schedule C filers)
- Returns with net losses
- Alimony deduction
- Large charitable deductions
- Foreign Earned Income Exclusion (FEIE)
- S Corporation with losses in excess of stock basis
If you are concerned about your tax audit risk, we can review your situation and advise if we identify any potential red flags. Please call RBI member Cray Kaiser if you would like a risk assessment or if you receive any tax notices that you are uncertain about.