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Odds of a tax audit: 3 things to know

It’s no secret that the IRS doesn’t have quite a much capacity as it once did to conduct tax audits.

We wrote about one aspect of that in our March 22 post on businesses taxes.

But what are the odds of a tax audit? Here are three things to know, in the form of a Q & A.

The U.S. Tax Code is notoriously complex. What percentage of Americans is in full compliance with its complicated provisions?

Forbes reported recently on the percentage of U.S. taxpayers who fully comply with the nation’s tax laws. That percentage is 83 percent.

To be sure, that is more than 8 out of 10. But it still leaves 17 percent of taxpayers out of compliance.

How often does the IRS actually audit returns?

Overall, the IRS now audits less than 1 percent of returns. In 2010, the rate was 1.1 percent. But with the budget cuts the agency has experienced, the rate is down to 0.8 percent.

Is it true that the audit risk goes up with income?

Generally yes. In a sense, the IRS follows the money.

On the lower end of the income scale, the IRS does devote significant scrutiny to taxpayers who claim the Earned Income Tax Credit.

But it’s well documented that on the high-income end, audits rates rise with income. In 2014, the audit rate was 3.6 percent for taxpayers who reported incomes between $500,000 and $1 million. And the rate rose with income, with an audit rate of 16.2 percent for incomes of $10 million or more.

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