IRS audit rates are low, and likely to go lower

Real Estate Tax Talk

The IRS recently released its enforcement statistics for the 2013 fiscal year. The statistics show declines in the audit rates for all income groups. Here are a few highlights:

For individuals, the overall audit rate in 2013 was 0.96 percent, which was the lowest rate since 2005. However, as you’d expect, the audit rates for individuals varied according to their income.

Audit image via Shutterstock.
Audit image via Shutterstock.

Individuals with income under $200,000 had a 0.88 percent audit rate, those with incomes of $200,000 to $1 million had a 3.26 percent audit rate, and those with incomes over $1 million enjoyed a 10.85 percent audit rate — more than double the rate for 2006.

What about businesses? For small corporations (with assets under $10 million), the audit rate was 0.95 percent. Corporations with assets over $10 million had a 15.84 percent audit rate. Partnerships and S corporations both experienced a 0.42 percent audit rate.

The revenue collected from all these audits was $9.8 billion, the lowest since 2003.

It seems likely that IRS audit rates will go even lower as a result of Congress’ 2014 budget deal. Under the deal, the IRS will get $11.3 billion to run its operations in 2014. This is $526 million below its 2013 budget and $1.7 billion less than President Obama requested.

The cuts are part of Repubican payback for the so-called “IRS scandal” in which conservative nonprofits were allegedly subject to heightened review by the IRS’ nonprofit unit. The cuts also make it harder for the IRS to help implement “Obamacare.”

As a result of the budget cuts the IRS previously experienced (an 8 percent cut since 2008), it had only 19,531 revenue agents on the job in 2013, the lowest number since 2004. With a whopping half-billion-dollar cut for 2014, the number of agents can only decline further.

In her 2013 Annual Report to Congress, National Taxpayer Advocate Nina E. Olson called the cuts the IRS previously experienced “shortsighted and counterproductive” and declared that the IRS desperately needs more funding to properly serve taxpayers and increase voluntary compliance with the tax laws. She must be really fuming right now.

However, the fact that audit rates are low and likely going lower doesn’t necessarily mean that you can easily get away with wholesale cheating. The IRS has sophisticated software in place that searches for anomalies in tax returns that can signal cheating. If anything in your return looks out of place, your chances of getting flagged for an audit go way up. This includes, for example, deductions that seem out of line with your income or type of business.

Stephen Fishman is a tax expert, attorney and author who has published 20 books, including “The Real Estate Agent’s Tax Deduction Guide,” “Working for Yourself,” “Deduct It!” and “Working with Independent Contractors.” His website can be found at fishmanlawandtaxfiles.com.


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