What Are the Odds the IRS Will Audit Your Tax Return?
Apr. 27, 2017 Kiplinger
President Trump’s tax returns are back in the news. His steadfast decision not to release the returns to the public raises the hackles of those who’d like to know just how the “massive tax cut” he has proposed would affect him personally.
The President argues that he can’t release the forms because they are being audited by the IRS. But if being audited blocked the release of a tax return, we never would have seen Barack Obama’s or George W. Bush’s or Bill Clinton’s or any other recent president’s. Even Richard Nixon released his returns while they were under audit.
Why? Because when it comes to the odds of being audited, one thing is crystal clear: If you’re living in the White House, your odds are 100%. The returns of the president (and the veep, too; sorry, Mr. Pence) get the going over every year, as required by Section 22.214.171.124 of the Internal Revenue Manual.
Assuming you’re not aiming to run the free world, though, what are your odds of being audited?
This is the quintessential good-news/bad-news story.
The good news: If you’re worried that the tax return you just sent to the IRS will be targeted, breathe easy. IRS Commissioner John Koskinen reported earlier this month that although the number of returns filed increases each year, the number of audits is going in the opposite direction. In 2016, the IRS did fewer audits than at any time in the past decade. And, there will be even fewer this year.
The bad news: If you’re an honest taxpayer, you’ll be disappointed to learn that the IRS says that every $1 it spends on audits and other “enforcement” activities brings in $4 to the U.S. Treasury. Falling audit rates mean dishonest taxpayers will be allowed to keep billions of dollars they ought to be paying in taxes. The IRS chief worries about a snowballing effect. “If I’m paying my fair share of taxes, but I see others who don’t and get away with it,” he says, “I’ll be a lot less motivated to be tax compliant in the future.”
But just what are the chances you’ll be audited, that your Form 1040 or 1040-A or 1040-EZ will be plucked from the 145 million-plus returns for a going over?
Clearly, the overall odds are reassuring. The vast majority (more than 99%, in fact) of individual income tax returns skate safely past the IRS audit machine.
Better news: The 1-in-143 chance of being called on the carpet vastly overstates the severity of the situation. Nearly three-quarters of all audits are handled by mail, not by mano a mano combat with an IRS agent during an office examination or a field audit. And if your return doesn’t include income from a business, rental real estate or a farm, or employee business expense write-offs or earned income credit, the basic 1-in-143 chance of being challenged dwindles to about 1-in-427.
Another piece of rarely reported good news: Each year, tens of thousands of taxpayers walk out of an audit with a check from the government. In 2016, for example, about 31,000 audits (1 in 4,400) resulted in refunds totaling $931 million. And 8% of field audits and 11% of correspondent audits end with the conclusion that everything is hunky-dory: no change in what the taxpayer owes Uncle Sam.