What Are Your Chances of an IRS Audit?

When it comes time to file your taxes, many wonder: what are my odds of being audited by the IRS? The IRS tends to audit taxpayers with certain characteristics. Returns that have unusual or questionable items are most likely to be flagged for an audit. But here are some additional audit trends we’ve seen:

Individuals are more likely to be audited than businesses. According to taxprotoday, “in 2017, the IRS reported a 1 in 184 (0.542 percent) chance of being audited for all taxpayers. For taxpayers filing individual returns, the likelihood of audit is 1 in 161 (0.623 percent). Corporations (1120, 1120-S) and partnerships are audited less than individuals – with an audit rate of 1 in 224 (0.445 percent). In 2017, the IRS audited only 1 in every 568 (0.176 percent) employment tax returns (Forms 940/941).”return

Audits on individual returns

The IRS utilizes its auditing resources to hone in on taxpayers that are most likely to be traditionally non-compliant, which would include small businesses, international taxpayers, high-wealth taxpayers, and possible Earned Income Tax Credit fraud schemes. Wage earners with traceable income reported on traditional Forms W-2 are less likely to be scrutinized.

Form 1040 taxpayer types, in descending likelihood of audit Returns audited
International taxpayers 1 in 19
Taxpayers with gross income before deductions of over $1 million 1 in 23
Sole proprietors with gross income before deductions between $100,000 and $200,000 1 in 48
Sole proprietors with gross income before deductions between $200,000 and $1 million 1 in 64
Taxpayers with self-employment income under $25,000 who claim the EITC 1 in 72
Farmers 1 in 228
Wage earners who make under $200,000 and don’t claim the EITC (65% of taxpayers fit this category) 1 in 364

Business tax return audit rates

Business/specialty taxpayer types, in descending likelihood of audit Returns audited
Large corporations (Form 1120, assets greater than $5 billion) 1 in 3
Estate tax returns 1 in 12
Large corporations (Form 1120, assets between $10 million and $5 billion) 1 in 23
Excise tax returns 1 in 72
Gift tax returns 1 in 130
Small corporations (Forms 1120, not 1120-S) 1 in 146
Partnership returns (Form 1065) 1 in 260
Estate and trust income tax returns (Forms 1041) 1 in 971
Employment tax returns (Forms 940 and 941) 1 in 568
S corporation returns (Forms 1120-S) 1 in 358

Audit costs

According to the IRS, at least 90 percent of individual return audits result in a tax change. On average, additional tax owed is $6,014 for a mail audit and $21,918 for a more extensive IRS field audit. Besides owing additional tax for audits and underreporter notices, accuracy penalties can add 20 percent to your tax bill.

Be proactive

Avoid IRS scrutiny by reporting all wage and income documents to the IRS on your return. Your CPA relies on you to provide them with all this information when they’re preparing your return. In return, your CPA will do their best due diligence to compare last year’s return and its income documents to the current year’s return. If you fail to report some of your income on your return, your CPA can file an amended return to avoid accuracy penalties that could stem from a notice or audit. If your return is selected for an IRS audit, your CPA is your best resource for navigating the waters and getting the best results.