A common deterrent for people to do their own taxes is the fear of being audited by the IRS. Here are some statistics on your chances of being audited.
- According to the IRS less than 1.4 million individual return were audited on 2007. That translates to a little bit over 1% of all returns filed.
- 21 % of those audits were to individuals with an income higher than $100K , the remnant (79%) was to individuals with incomes lower than $100K.
- The amount of individual returns audited for incomes lower than $100K only rose by 10% last year. Audits for individual returns with income greater than $100K increased by 13.7% and for incomes greater than $200K the amount of audits increased by 29%. So the pressure is increasingly on individuals with higher income.
- Scrutiny will also be higher for self-employed individuals (S-Corporations, Partnerships) because income to this individuals is not reported independently to the IRS. No amount of taxes is withheld from their paychecks.
- How does the IRS pick a return for audit? One way is through the use of a sophisticated computer program that scores tax returns. The ones with the highest scores have the greater chance of being audited. The IRS also selects based on mismatches. You failed to include something on your return that was reported separately to the IRS (such as a 1099-INT submitted by your bank or investing company, or maybe you skipped a W-2 from that job you only held for two weeks). Also, your tax preparer may be flagging the IRS. A return may be selected if the IRS suspects a tax preparer of wrongdoing.
- Even if you do get audited don’t expect to be brought in to a local IRS office. Most issues are handled via correspondence and ask for an specific issue. I always keep my tax professor’s advice in mind for this:”don’t give any more information than what they are asking you for.” Answer their question only.
If you ever do get audited, don’t be like that couple in New Hampshire who barricaded themselves in their house for months claiming that there was no law to make them pay taxes. So they skipped paying taxes for ten years.
Source: High Earners Face Surge in Tax Audits by Tom Herman from the WSJ.