Will the IRS Hunt You Down This Tax Season?

The Treasury Inspector General for Tax Administration estimates that taxpayers will owe $345 billion more than what they claim they owe on their income tax returns this year.

Tax professionals are obligated to prepare your returns as if they were going to be audited by the Internal Revenue Service. What’s more, according to Forbes contributor Tony Nitti, they are not permitted to make decisions regarding a filing position based on the likelihood that it will be examined.

What this means is that tax professionals are bound by sacred oath to not game the audit lottery. They are (technically) not allowed to advise you on the likelihood that your return will be audited based on how you choose to file. (How many of those dinners were really necessary to close the deal?)

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The likelihood of an audit seems to be a popular statistic to want to know this time of year. Fortunately, every year the IRS compiles a fat book of data that contains this information. Even better, here’s a list of last year’s audit rates by adjusted gross income, assembled by Stephen Fishman, so you don’t have to go digging:

No adjusted gross income 3.42%
$1- $25,000 1.22
$25,000-$50,000 .73%
$50,000-$75,000 .83%
$75,000-$100,000 .82%
$100,000-$200,000 1%
$200,000-$500,000 2.66%
$500,000-$1,000,000 5.32%
1,000,000-$5,000,000 5.38%
$5,000,000-$10,000,000 20.75%
over $10,000,000 29.93%

So the short answer to the question is: no, the IRS is not likely to unleash the Treasury Inspector General for Tax Administration upon you. Less than 5 percent of U.S. householders earn more than $200,000, although thanks to the 2008 crisis and continued high unemployment, the number of households earning between $0 and $25,000 is as much as 28 percent…

Still, the the majority of Americans have less than a 1 percent chance of being audited, if last year’s rates hold true. That said, it also seems unlikely that the IRS will choose to distribute its sparse resources differently this year. There are a few reasons for this. First, the IRS would have to dedicate a tremendous amount of resources to actually increase the likelihood of increasing the audit rate for any income range between $25,000 and $200,000, given the total population of that range.

Second, if the IRS is going to spend additional resources chasing any income bracket, it will probably be the highest few. If there is an auditor to spare, would you assign him to a suspicious median income earner or a suspicious millionaire? This, combined with the total relative households in each bracket, is why audit rates are higher at the top of the income ladder.

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Third, IRS audit rates in general are on the decline, falling 5.3 percent in 2012. Reports suggest that the trend will continue this year because even the IRS wasn’t spared from sequestration. Not only is the IRS in a hiring freeze, but workers face five to seven days of furlough this summer. The IRS lost 7,000 employees last year, and staffing for key enforcement positions is down 6 percent.

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