I have yet to meet a client who was excited by the thought of an IRS audit, let alone audit trends. In reality the thought of an audit can almost make a person break out in a cold sweat, have an increased heart rate and mimic the signs of a panic attack. Well maybe it’s not that bad but certainly it is not a welcome thought. What’s the reality behind the IRS audit? How likely is it that the next time you go to the mailbox there will be that unwelcome letter that notifies you that you have been chosen for an audit?
If you look at historical trends of an IRS audit, you’ll find that the rate of IRS audits has been on a decline from 2010 to the present. The audit rate has dropped from a rate of .93% in 2010 to .51% in 2018. The number of IRS audits has declined by almost fifty percent from 2010 to 2018. The IRS workforce has decreased over the last five years by roughly 15.5 percent. The decrease in IRS audit rates is in large part due to the diminished resources with which to perform the audits.
Audits done by mail have replaced the traditional field audit in large part. In 2018 75% of the audits by the IRS were done as mail audits. You may have received one of these audit notices that challenges credits or deductions on your return. For example, you may be asked to provide the substantiation for your charitable deductions. If you do receive an audit notice by mail your worst course of action is to ignore it. The Taxpayer Advocate estimates that almost two-thirds of mail audits are not responded to. A non-response leads to the IRS ability to assess the additional tax without the taxpayer having contested the determination.
What might cause your return to be audited? It seems the earned income credit may result in a higher audit rate. The earned income credit was designed to be a benefit for working people with low to moderate income. There are certain requirements to qualify for the earned income credit and a tax return must be filed even if there is no tax owed. The credit, while designed to provide incentive to workers has been an easy target for abuse. IRS estimates have indicated that between 21 to 26 percent of earned income tax credit claims are paid in error. An error rate in this range translates to billions of tax dollars paid out in error. The IRS efforts to curb this abuse has led to roughly 50 percent of all individual audits involving a taxpayer who is claiming the earned income credit.
If you are audited, how likely is it that there will be a change? From 2005 to 2018 the audit change rate has been between 81 percent and 89 percent on returns chosen for audit. While the rate of audits has declined the IRS has confidence in the ones that they choose will result in an audit adjustment.
Most everyone would agree that an audit by the IRS is not a desired event. The 2018 Comprehensive Taxpayer Attitude Survey conducted for the Pacific Consulting Group for the IRS indicated that 95% of polled taxpayers indicated that it was every American’s civic duty to pay their fair share of taxes. 63% of taxpayers cited fear of an audit as an influential factor for correctly filing and timely paying their taxes. If you receive notice of an audit rest assured your Henry + Horne tax professional is prepared and ready to assist you as you navigate the audit process.
Cheryl Dickerson, CPA