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Who Is Likely to Be Targeted for an IRS Audit?

Who Is Likely to Be Targeted for an IRS Audit?
Ines Zemelman, EA
10 December 2016

Are you wondering if you are at risk for an audit? Chances are, you probably won’t see one.

As the end of the year approaches, you may be starting to worry about having your taxes audited by the IRS. But, you likely have very little reason for fear. Last year, not even 1% of taxpayers were audited by the IRS - and the trend is toward even fewer audits this year.

It is simple math. The IRS has fewer auditors, so they can’t conduct as many audits. Over 2,200 IRS agents have been lost since 2010. This brings the total to around 11,600, which is the lowest number in over a decade.

Nonetheless, there are some people who are more likely to get scrutinized than others. While the IRS does not publish exactly why they single out certain returns for audit versus others, simply looking at the Internal Revenue Service’s track record does give some clues. The following are the ones that are most likely to attract the attention of the government:

Those with reported income over USD 10,000,000

Criminals choose to rob banks because that is where they can find the money. The same goes for the IRS. Since they have limited resources, they look harder at the people who have the greatest amounts of money (and thus, the most motivation to hide it). The IRS has stated that they target the rich as part of their strategy.

This strategy is game changing. The IRS will first focus on people with high levels of income or assets. Then, they will take comprehensive looks at all of the businesses run by wealthy individuals, which they believe will help them assess the overall risk these businesses and individuals pose to full compliance with tax regulations.

In 2014, over 16% of those returns showing over USD 10,000,000 were audited by the IRS. But, as shown in the below table, that isn’t to say that those with a couple million dollars shouldn’t watch out too.

Those with no reported income

It isn’t just those with high incomes who are more likely to get audited. People reporting no income also raise red flags at the IRS. For example, if a business is reporting a loss, the IRS is more likely to double check the honesty of the business owner. In 2014, 5.3 percent of taxpayers reporting no income were audited by the IRS.

Returns by Income Percent of Total Returns Percent Audited in 2014
All returns 100% 0.86%
No adjusted gross income 1.83% 5.26%
$1 - $24,999 39.08% 0.93%
$25,000 – $49,999 23.32% 0.54%
$50,000 – $74,999 13.12% 0.53%
$75,000 – $99,999 8.33% 0.52%
$100,000 – $199,999 10.70% 0.65%
$200,000 – $499,999 2.87% 1.75%
$500,000 – $1 million 0.48% 3.62%
$1 million – $5 million 0.24% 6.21%
$5 million – $10 million 0.02% 10.53%
Over $10 million 0.01% 16.22%

Those who file a tax return for estates with assets worth over USD 5,000,000

Very large tax returns for estates also raise eyebrows with the IRS. In 2014, 8.5 percent of tax returns for estates were targeted for extra scrutiny, compared to only 0.9 percent of regular individual returns.

As the estate gets larger, the chance of audit increases. For estate returns showing assets of between USD 5,000,000 and USD 10,000,000, over 21% were audited for 2014. Returns for over USD 10,000,000 were audited at a rate of 27%.

That being said, tax returns for estates are relatively rare. In 2013, 33,719 estate returns were received by the IRS, but just 3,359 were reporting estates of over USD 10,000,000.

Those filing international returns

During the past few years, the Internal Revenue Service has increased the scrutiny they give to international returns. If you are mailing them your return with an overseas address, know that they are on to you.

The IRS has made overseas tax evasion one of their top priorities. In 2014, 4.8% of all international returns were audited.

The cost of fewer audits

While fewer IRS audits sounds like a good thing, for most citizens it is not. The IRS projects they will miss out on over USD 2 billion of tax money due to lack of audits. Not to mention, sometimes audits result in taxpayers getting some money back. For the 2014 tax year, the IRS refunded some amount to 38,029 individuals who they audited and determined paid in too much.

Ines Zemelman, EA
founder of Taxes for Expats