With doing our taxes properly on our minds, what are the chances we’ll get caught if we don’t? Well, there are several ways that the IRS can detect if your return is suspicious, especially if your inputs don’t match up with their W-2 and 1099 records.
Here are the number of IRS audits and the respective probabilities for individuals and businesses during 2010. Large corporations and wealthy individuals have the highest chance of getting audited, which makes sense since they offer the largest potential payoff. If you are an individual making under $200k a year, then your overall chances are 1 in 100. However, I’m sure if your tax return is clean and you didn’t claim to donate $10,000 in used clothing, your actual odds are even better.
Source: IRS, Businessweek
Anyone out there get audited last year?
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“Large corporations and wealthy individuals have the highest chance of getting audited, which makes sense since they offer the largest potential payoff.”
High income != wealthy IRS doesn’t track wealth, they know about income.
Investor Junkie:
You’re absolutely right, and this illustrates a basic problem with the way Americans think about money. High income = rich. Unfortunately if you spend more than you earn, it doesn’t really matter how much you earn. You’re not rich. You have no wealth. I know too many who fit that description. How many doctors/lawyers/dentists/investment bankers, etc. have you met who make tons of money, and are “living the good life”, but are up to their eyeballs in debt?
So high income can = wealthy with a touch of self control. Therefore if someone with an income consistently in excess of 250k a year thinks of his family as poor or in financial trouble, that person probably isn’t very good with money. That kind of income should equate to savings and lots of it.
@bgdc: Yes agreed. My point is by itself high income doesn’t equal wealth. Yes over time if you consistently make a high income and save at a decent rate (cash flow).
My point has always been cash flow is more important than high salary, or just a high net worth by itself.
http://investorjunkie.com/400/does-net-worth-matter/
Good catch @InvestorJunkie. That aside, though, it’s still good to see this chart republished here. I missed it in Businessweek. Very interesting. 🙂
Watch out, otherwise the government will just start taxing people based on their net worth, and us savers will get it even worse!
Red flags or suspicious information on your taxes will cause audits more often. If you aren’t doing anything suspicious and you have a straight forward return then your chances of an audit should be lower than 1%. If you’re lying and making up numbers and claiming unusual deductions then your chances of an audit should be much higher than 1%.
The sole proprietor audit rate interests me (bc I am one!) Do you think this has to do with the supposed likelihood that you are “flagged” by the IRS if you claim a deduction for a home-based business? I have one, and it is legit. But who wants to be on the IRS’ bad side? Any thoughts by those who have taken it?
I was subject to a correspondence audit in the last year, of my 2008 personal income tax return. I received a letter from the IRS explaining that I had claimed ~2200 in IRA rollover activity, but that they had a different amount reported to them (right around double 2200), and they wanted 600 or so in tax. I looked into it and it stemmed from an IRA I had with ING. I held 5 different funds. When I rolled the IRA into a new employers 401k, ING didn’t want to do a trustee to trustee transfer (a tactic they use to prevent customers from leaving), so I took a distribution and rolled it over myself. Anyway ING, when they reported the distributions to the IRS, instead of rounding up, CUT OFF the cents on each of the five funds, essentially rounding down. That caused a several dollar difference between the amount I reported on my tax return that I rolled over (the actual amount) and the amount the ING reported to the IRS. Because of the difference, the IRS automatically assumed there were TWO separate rollovers. I sent them copies of my ING account statements, the check I received from ING, the cashiers check I purchased with it to roll over into my new 401k, and an explanation letter. I got a favorable outcome 🙂 They wrote back weeks and weeks after I sent in my compiled information, and acknowledged I was correct 🙂
Jim nails it on the head – you would be amazed at what people dare to report on their tax returns, sometimes. A lot of obvious errors flagged for audit.
@Stephanie – if you are doing thing legit, don’t worry about it. People way over-stress about these things.
That said, home office deduction used to be much more stringent and abused and it used to be a red flag for audit. That is no longer the case. If it were the case and you legitimately claimed the deduction though, I’d say it would be silly to worry about.
I’m surprised the number of audits is actually above 1%. I wonder the payout versus expense of these audits and how much more they make by taking the time to audit 1 million + people.
People misread these numbers. For example, in the case of individual tax returns, the IRS does not pull returns out of a hat, the audits are targeted. First, each return is run through a series of algorithms. One such item is thought to be high itemized deductions to AGI, but the exact items are obviously a secret. Second, employer withholding and other withholding schemes make it easy for the IRS to match income reported by an employer and an individual.
If an individual taxpayer wants to omit income thinking there is 1/100 chance of getting caught, best of luck. The probability is closer to 1/1 for things like wage income, exemptions, mortgage interest, etc.
Like nate, I too had a correspondence audit last year of my 2008 taxes. It stemmed from IRA activity as well. I had rolled a traditional IRA into a ROTH about 3 months before the market crashed. I took advantage of the ability to ‘recharacterize’ the transaction late in the year to avoid paying taxes on something that had lost most of it’s value. Unfortunately the broker did not file the appropriate paperwork with the IRS at the right time and just reported the rollover. The initial IRS letter was worded pretty harsh. After I submitted a full explanation, transaction records, and received correct documentation from the broker, I was pleasantly surprised with the IRS response. They acknolewdged that everything was correct as initially submitted, closed the case, and actually offered an ‘apology for any undue stress the process may have caused’.
Question regarding this line: “especially if your inputs don’t match up with their W-2 and 1099.”
How about when you have interest from savings accounts that is only a few bucks. I’ve read that when it’s less than $10 in interest, the bank doesn’t report it. However, I’m required by law to report it myself.
Wouldn’t my numbers not match up and cause a possibly flag? Granted, I’d be overpaying by a few bucks, but still.
@Paul
Since they know banks don’t report low numbers like that, it wouldn’t cause a flag. Also, for interest under $10, tax is likely $3 or less, and they’re not likely to care about a rounding error like that.
ok so i kinda get what u guys r sayin on this subject but my question to u guys is. what are my chances of audit if both my parents n myself claim myself in the tax refund??
Your chances increase exponentially with certain deductions like a home office for example.
Everyone says the chances of getting audited are slim to none if you are not wealthy. Well I am here to tell you they are wrong. In the last two months my fiance, my niece and her husband and myself have received audit notices. My fiance and I (filed separate) are both being audited in the year we both lost our jobs. Me; because I settled with a creditor for the amount I owed on my ex-husbands truck. I never knew that the IRS considers the difference (debt forgiveness) as income! Which is BS. My fiance because his mileage records (truck driver at the time) don’t match up with the ones they have on record (didn’t know they kept mileage records)! That is not all. My niece and her husband have their own business and they too were audited! What are the chances that four people in the same family (two separate tax payers in the same household) get audited all for the same year (2009) ???!!!!! It’s ridiculous! By the way, we all four had our taxes done by different companies. I used HR Block on the web, my fiance went to Jackson Hewitt and my niece and her husband used their accountant! Again… Ridiculous!
Tberlin, you all were audited because you have complicated business deductions. You situations will not apply to the average individual tax file!
My husband got audited in 2010 for 2007 return, because I didn’t input a 1099 that was rec’d late Feb, early March. I submitted taxes before receiving the form and neglected to ammend the return. It was a very small amount, but because it was income not reported it caused a red flag on our retun. My point, DO NOT exclude any forms – if you’re waiting or notice any tax forms missing…wait! It’s a pain to be audited.