26 Nov

IRS Audit Rates Keep Falling

Accounting Today had an awesome article about IRS audits and the recent trends. The good news for taxpayers is that audit rates are down overall. In 2010 the audit rate was 0.9%, or 1.735 million tax returns. Last year it was only 0.5%, or 991,000 tax returns.

There is even better news with some of the specifics:

  • Most audits are done by mail. The IRS asks for information and the taxpayer sends in the responsive documents. The number of field audits (an IRS auditor working directly with a taxpayer to address issues) keeps dropping, and last year the numbers were at an all-time low. Field audits are done for complex tax situations, and less than 250,000 were done last year.
  • S-corporation or partnership tax returns have a very low audit rate at 0.22%. That’s less than half the overall audit rate of 0.5%
  • If you make more than $1 million a year, your likelihood of audit is higher. 3% of taxpayers making more than $1 million were audited last year, but that’s down from the 12% who were audited in 2011.
  • Criminal investigation cases are down 58% in the last five years. During the same period, the number of revenue agents (field auditors) and criminal investigators has dropped by about 25%. So it’s only natural that prosecutions have gone down too.

As Accounting Today notes, the IRS has always used the fear of audits to get people to voluntarily report all of their income and pay the taxes they owe. With audits down, that fear might not be so great anymore. However, the IRS uses other non-audit tools (such as letters that notify taxpayers of discrepancies and taxes due) which still create fear in taxpayers, and may therefore encourage compliance.

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