What Are the Odds the IRS Will Audit Your Tax Return?
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.
TOOL: Pinpoint Your Audit Odds
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 184.108.40.206 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.
The 1-in-143 chance of being audited is the overall average from last year. As noted above, there’s an even smaller chance this year. But in any year, your personal odds turn on the kind of return you file and the amount and types of income you report.
SEE ALSO: The Most-Overlooked Tax Deductions
Our calculator, based on official IRS data on returns audited in 2016, will give you a good idea of the odds that your personal return will be selected for review—either by mail or in person. And, remember, even if it is, there's a decent chance you'll walk away unscathed or be one of the lucky ones whose audit results in a refund.
With few exceptions, of course, the IRS doesn't randomly choose which returns to audit, although random reviews are used to help the IRS calibrate the computers that identify the juiciest targets.
Over the next few months, the IRS will be plugging data from more than 145 million 2016 tax returns into a computer that scrutinizes the numbers every which way and ponders how the picture you paint of your financial life jibes with what it knows about other taxpayers. The computer tries to spot returns that are most likely to produce extra tax if put through the audit wringer. The computer's choices are reviewed by a human being who can overrule them if, for example, an attachment to your return satisfactorily explains the entry that set the computer all atwitter. Short of such a veto, your name will go on the list.
Even if your return survives the computer's scrutiny, you're not necessarily safe. You may have listed an investment in a tax shelter the IRS is particularly interested in, for example, or the agency might decide to take a closer look at your return because it smells of the latest scam du jour identified by the IRS. (See Red Flags That Could Raise Your Audit Risk.)
And there's always the chance that someone has fingered you as a tax cheat. The IRS encourages such tips and even pays a bounty for leads that pay off in extra tax.
If you “win” the audit lottery, see What to Do if Your Tax Return is Audited, which includes links to manuals that IRS agents use to know what to look for when auditing various kinds of businesses.