It's common for taxpayers to wonder how likely it is that their tax return will be audited, as the prospect of an IRS tax audit is rather worrisome. Here are three bits of good news, though: It's very unlikely that you'll be audited, there are ways to decrease your odds further, and even if you are audited, it's not likely to be too traumatic.
An IRS tax audit: What are the odds?
According to the 2015 IRS data book, there were about 147 million individual tax returns filed in 2014. Of those, a sizable 1.2 million ended up "examined" -- i.e., audited. Take heart, though, because although 1.2 million is a big number, 147 million is far huger: Overall, less than 1% -- a mere 0.8% -- of the returns were audited.
Here's even more encouragement: According to IRS Commissioner John Koskinen in a March 2016 speech, relentless budget cuts by Congress has left the IRS less effective, with more than 5,000 fewer people since 2010 "who audit returns and perform collection activities, as well as... investigate stolen identity refund fraud and other tax-related crimes." He added, "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, if you're wondering, "Will I be audited by the IRS?" -- the answer is most likely, no.
The budget cuts are not actually a good thing, though, because fewer audits mean fewer dollars collected that were due to the government. Per Koskinen, "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."
Make an IRS tax audit even less likely
Your odds of being audited are quite low -- but you can reduce them further in several ways. For example:
- Don't fail to file a return. If you don't file a tax return for any reason, the IRS may contact and question you. Even if you had no income in the tax year or had no taxes due, you still need to file a return, explaining that you have no income and/or demonstrating that you have no taxes due.
- Try not to have no income. 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, 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 omit 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 tiny dividend payment you don't want to bother mentioning, it needs to be included -- not only because it's the right thing to do, but also because the IRS probably already knows about it and will wonder why you haven't mentioned it. Entities that pay you -- whether it's salary payments, dividend income, interest paid, or something else -- generally report having done so to the IRS. The IRS then expects your return to include all of these payments.
- Don't be messy. Your odds of being audited can rise if your handwriting is hard to read. 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. Avoiding audits involves trying to avoid having any attention drawn to your return. You want it to be one of millions that smoothly gets processed without question.
- Don't make math mistakes or other mistakes. Double-check your calculations and be sure that any numbers you're entering in your return are correct. Enter the right numbers in the right boxes. It can be very helpful to use tax-preparation software and to electronically file your return, as such returns can be more accurate than hand-prepared ones. Remember to sign your return, too: Unsigned returns also draw the attention of the IRS.
- 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 actually have a home office, and one that conforms to the rules, such as being used solely for your business.
- Don't use a problematic tax preparer. If your tax return is prepared by your well-meaning uncle, you could end up audited if he makes mistakes. Professional tax preparers can make mistakes, too, of course. Unscrupulous ones can be committing fraud with your return in order to lower your taxes, or they can even be stealing from you. Ultimately, you're the one responsible for your tax return. Still, consider using a qualified preparer, as a good one will be much more informed about tax laws, available tax breaks, and strategies you might employ. A good tax pro can serve you well and reduce your tax bill.
What if you're audited anyway?
Despite all your precautions, you may still end up audited -- either due to factors out of your control or perhaps just due to chance. 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, 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.
Even if an audit happens, though, don't freak out. It's very often a relatively minor event. About 70% or more of audits are conducted through the mail, not by requiring you to sit across a desk from an IRS agent. And many of them result in additional money coming your way, too. Audits can seem scary but they're not usually a problem if you've been honest.
So stop worrying about being audited: An IRS tax audit is not likely to happen, there are steps you can take to make it even more unlikely to happen, and even if you are audited, it's not likely to be too terrible an experience.