According to the IRS Oversight Board’s annual taxpayer survey, the majority of Americans, about 86%, believe that it’s wrong to cheat on federal income taxes, most agree that people who do cheat should be punished, and 95% mostly or completely agree that “it’s every American’s civic duty to pay taxes.” Although there are no reliable statistics on the number of taxpayers who cheat, some estimates put the number at roughly 1.6 million, or about 1% of all tax returns filed.
Although a large majority of taxpayers believe that cheating is wrong, and an even larger percentage don’t, in fact, cheat, “IRS audit” remains among the most universally feared phrases in the English language. According to Money, however, that fear is unjustified for most: less than 1% of all tax returns are audited in any given year, making the odds of an audit, on average, more than 100 to 1.
The Number of Annual Audits Is Decreasing
The number of audits has been on the decline in recent years, due primarily to fewer auditors. As IRS Commissioner, John Koskinen, explains:
“The math is pretty simple. There are fewer audits because we have fewer auditors. The IRS lost more than 2,200 revenue agents since 2010. Last year alone, there were 600 fewer auditors, with the total falling to 11,600—the lowest level in more than a decade.”
When Is Concern about an Audit Justified?
Even though the odds of being audited are relatively small, the IRS does give some tax returns more scrutiny than others. Here are 5 red flags that might signal you are more likely than most to face an audit:
1. You Have a High Annual Income: taxpayers at the upper end of the income spectrum are much more likely to be audited. For example, in 2014, the average percentage of audited returns was 0.86%. Among taxpayers who earned between $50,000 and $75,000, only .53% were audited (about 1 in 20). That number increased to 1.75% for those earning between $200,000 and $499,999, 3.62% for earners with an annual income between $500,000 and $1 million, 6.21% for those earning $1 million to $5 million, 10.53% for those earning $5 million to $10 million, and 16.22% for those who earned more than $10 million, roughly 1 in every 6 taxpayers.
2. You Had a Precipitous Decline in Income: the IRS maintains historical data on taxpayer income. When earned income drops dramatically from one year to the next, the IRS suspects that income is being under reported. This could trigger an audit.
3. You’re Employed but Didn’t File a Return: when employers send a 1099 or W2 to an employee, they also send it to the government. If the IRS notices an employer form with no employee tax return match, they sometimes decide to audit.
4. You’re Self-Employed: some experts believe working for yourself and claiming a home office deduction could set off alarm bells in the IRS. Others, like Forbes, call this an “old wives tale.” To be on the safe side, if you claim the home office deduction, keep careful records of all the expenditures you claim, and be prepared to demonstrate that the office space in your home is used “exclusively and regularly” for business.
5. You Have Unusually Large Charitable Deductions: taking a deduction for contributions to charities won’t normally trigger an audit. What does raise a red flag are contributions that are disproportionately high compared to your income. On average, taxpayers contribute 3% of income to charity—anything higher than that could raise eyebrows.
The chances in any given year of being audited are small, especially for those who make less than $200,000. Still, it’s always smart to be sure you have all your ducks in a row. Your best bet is to work with someone who knows how the tax system works and can help you navigate through it. If you have questions about your taxes or would like some helpful advice, contact us today.