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 audited, breathe easy. The head of the IRS says that budget constraints mean that his agency will perform 100,000 or so fewer audits this year than last.
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. Or, as the Boston Globe concludes: “Tax cheating gets easier.”
But just what are the chances you’ll be audited?
Clearly, the odds are reassuring. The vast majority (more than 99%, in fact) of individual income tax returns skate safely past the IRS audit machine.
TOOL: Pinpoint Your Audit Odds
Better news: The 1-in-104 chance of being called on the carpet vastly overstates the severity of the situation. Fully 70% of all audits are handled by mail, not by mano a mano combat with an IRS agent. And if your return doesn't include income from a business, rental real estate or a farm, or employee business expense write-offs, the basic 1-in-104 chance of being challenged dwindles to just 1-in-250.
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 2013, for example, almost 40,000 audits resulted in refunds totaling nearly $950 million. And 9% of all audits end with the conclusion that everything is hunky-dory: no change in what the taxpayer owes Uncle Sam.
The 1-in-104 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 type of income you report.
Our calculator, based on official IRS data on returns audited in 2013, will give you a good idea of the odds that your personal Form 1040 (or 1040-A or 1040-EZ) will be selected for review—either by mail or in person. And, remember, even if it is, there's a 1-in-8 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 140 million 2013 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.
See Also: 14 IRS Audit Red Flags
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.
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.
Whatever the reason you're chosen for an audit, it's chilling to get the word that the IRS wants to examine your return. After all, everyone knows that the IRS was able to do what J. Edgar Hoover and all the G-men of the FBI couldn't do: put Al Capone behind bars. Even if you have no reason to think you did anything wrong, you can't escape the anxiety that accompanies an audit notice. For one thing, the return being audited is unlikely to be the one you just filed. A lot of taxpayers are only now hearing from the IRS about their 2012 returns ... and some 2011 returns are just coming up to bat. (Generally, the IRS has three years from the due date of your return—until April 15, 2017, for 2013 returns—to initiate an audit.)
How It All Begins
You'll get a letter announcing your fate. The simplest audit—a correspondence audit—requires only that you mail in the records needed to verify a specified claim on your return. In a field audit, an IRS agent comes to your home or place of business to go over your records. Most common, though, are office audits, which involve getting yourself to a local IRS office. You'll probably have at least a couple of weeks to prepare. If the appointment is set for an inconvenient time or you find that you'll need extra time to pull your records together, call the IRS promptly to request that the audit be rescheduled.