Odds of Being Audited by IRS  

August 20, 2017

If you, like others, dread the thought of being audited by the Internal Revenue Service, then you should know that the IRS, like any good business, concentrates its efforts where they produce the best results (tax revenue)!

 

People refer "getting audited" as winning "IRS lottery." However, the audit selection process is "from random" according to IRS commissioner. IRS has developed a DIS (Discriminant Function) system to identify potential audit targets. Each return are scored using the DIS system. Of course, the higher the score, the bigger audit chance.  The DIS's mathematical formulas are confidential, same with the DIF score.

 

The audit also might be triggered by IRS matching program(such as form 1099). Last,  the audit selection process favors returns with red flags such as returns claiming the earned income tax credit (EITC), for which a lot of fraud is prevalent, the filing of the tax-shelter return, as well as big business returns and returns for higher-income taxpayers.

 

Every year, the IRS releases the “IRS Data Book,” which describes activities conducted by the IRS during the prior Fiscal Year. It provides, among other things, information about how many tax returns the IRS examined (audits), how it examined them and what categories of returns the IRS focused its resources on. The most recent Data Book includes audit data from the fiscal year 2016.

 

The IRS collected more than $3.3 trillion in gross taxes and issued more than 122.3 million refunds totaling more than $426.1 billion. The IRS also collected almost $345.6 billion in income taxes, before re­funds, from businesses.
  
The overall IRS audit rate is 0.7 percent for all individual tax returns filed in the calendar year 2015. The table below illustrates the percent of tax return audited in each income category:

 

 Adjusted Gross Income reported                                         Percent Audited

 

              None                                                                           3.25

$1 to under $200,000                                                            below 1

$200,000 to under $500,000                                                  1.01

$500,000 to under $1,000,000                                               2.06

Over  $1,000,000                                                                 4.60 and up

 

As you can see from above, the chances of being audited were much higher for the high-income earners. Anyone who makes more than $500,000, the odds of being audited is much higher than rest of the Americans.

 

 

Of the 1,034,955 individual income tax returns that were audited, only 23.6% of the individual audits were face to face audits conducted by IRS agents, tax compliance officers, tax examiners or revenue officer examiners. due to limited IRS funding problem, the remaining 76.4% were correspondence audits(inquiry by mail or telephone)

 

 

If you receive a tax audit letter or correspondence from the IRS or state taxing authority questioning your tax return, Please do not ignore. (read my article). Call tax experts to review the notice. This is especially true with all of the scammers out there pretending to represent the IRS and state taxing authorities. Remember: the IRS does not initiate contact by e-mail.

Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.

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