Tax audits are a common fear in the United States. A survey this year by the folks at NerdWallet found that 11% of respondents fear an audit, while 69% are worried about tax preparation in general and 17% have concerns about making a mistake. If you find yourself lying awake at night wondering, "Will I get audited?" then take a deep breath.
The truth is that you probably won't be audited, and there are ways to reduce your chances further.
The odds favor you
Just how unlikely is it that you'll be audited? Well, according to the IRS' 2014 Data Book, the odds of being audited were lower than 1% for those with incomes between $1 and $199,999. (That probably includes you, right?) For those earning between $200,000 and $499,999, it was still under 2%, and for those with incomes between $25,000 and $99,999, it was close to 0.5%.
On top of that, IRS Commissioner John Koskinen recently said that relentless budget cuts in Congress have left the IRS less effective:
The portion of our full-time workforce that has been lost since 2010 includes over 5,000 key enforcement personnel. These are the people who audit returns and perform collection activities, as well as the special agents in our criminal investigation division who investigate stolen identity, refund fraud, and other tax-related crimes. ...
As you might imagine, these staffing losses have translated into a steady decline in the number of individual audits over the past six years. Last year, in fact, we completed the fewest audits in a decade. ... That trend line of fewer audits will continue this year.
Clearly, there's no reason to lose sleep over fears of an IRS audit.
Don't celebrate that news too much, though, as it's not all good. Fewer audits mean the government loses out on more money that it's owed. Koskinen added that "historical collection results suggest that the government is forgoing more than $5 billion a year in enforcement revenue, just to achieve budget savings of a few hundred million dollars."
Reduce your odds of getting audited even more
Even though your chances of getting audited are low, you can take steps to make them more so. Here are some tips:
- Don't be messy. If your handwriting is hard to read or you're not careful when filling out forms, that can increase your odds of being audited. The IRS needs to be able to make sense of your tax return, and if it can't tell whether that's a 0 or a 6, or your return is just too hard to read, it will draw attention. You don't want any attention drawn to your return. You want it to be one of many millions that smoothly get processed without question.
- Don't make math mistakes or other ones. Be sure that any numbers you're entering in your return are correct. Double-check your calculations and be sure you're entering data in the right boxes. It can make a big difference to use tax-preparation software and to electronically file your return, as such filers can have greater accuracy in their returns than hand-prepared ones. Remember to sign your return, too -- as unsigned returns can also draw the attention of the IRS.
- Don't leave out information. If you fail to report any income or omit any other information, that can raise flags at the IRS and get you audited. Even if it's just a seemingly inconsequential dividend payment you don't want to bother mentioning, it needs to be included. It's the right thing to do, of course, but note that the IRS probably already knows about that payment to you and will be wondering why you haven't mentioned it. Entities that pay you generally report having done so to the IRS -- whether they're reporting salary payments, dividend income, interest paid, or something else. The IRS then expects your return to include all of these payments.
- Don't neglect to file a return -- or have no income. If you don't file a tax return for any reason, then the IRS may contact and question you. Even those with no income or no taxes due need to file a return, explaining that they have no income and/or demonstrating that they have no taxes due. Your odds of being audited are higher if you report no income -- even if you've filed a return. For example, if you have your own business and you posted a net loss for the year, then the IRS might want to double-check to make sure you're not pulling a fast one. In 2014, about 5.3%of returns with no income were audited.
- Don't be dishonest. If you're stretching the truth on your tax return -- especially if you're self-employed -- you may catch the attention of auditors. Be ready to substantiate any claims (business meals, business-related miles driven, business entertainment costs, etc.) with receipts or other documentation. If you're claiming a home-office deduction, you'd better have a home office, and one that conforms to the rules, such as being used solely for the business.
- Don't use a problematic tax preparer. If your tax return is prepared by your well-meaning uncle, that could land you in an audit, if he makes mistakes. Using a professional won't protect you from an audit, either, because the pros can make mistakes, too. Unscrupulous ones can be committing fraud with your return to lower your taxes, or they can even be stealing from you. Ultimately, you're the one responsible for your tax return. Don't give up on using a qualified preparer, though, as preparers should be much more informed about deductions you might take and strategies you might employ. Good ones can serve you well and reduce your tax bill.
Bad news and good news
You may still end up getting audited, of course, possibly because of factors outside your control. For example, self-employed folks and those with very high incomes are audited more often than more typical taxpayers. Those with deductions of unusual size can also trigger audits. That's because the IRS will generally compare the numbers in your return with averages. If you're claiming a much bigger deduction for charitable donations than the average taxpayer with your income profile, that will draw attention. Similarly, if you claim deductions for business travel or meals that are above average for a business like yours, the IRS might want to look a little closer.
Even if an audit happens, though, don't freak out. It's often a relatively minor event. About 70% or more of audits are conducted through the mail, so you probably won't have to sit across a desk from an IRS agent. And sometimes an audit even reveals that the taxpayer is owed money. Audits can seem scary, but they're rarely a problem if you've been honest.