What Are Your Chances of Being Audited?

The IRS recently released its statistics of income publication, which included statistical data for audit rates for the fiscal year 2005 and compared them to 2004.  The data shows that the audit trend rate is up.  Note: This data refers to audits of all years from the fiscal year October 1, 2004 through September 30, 2005.

Of the 130.6 million returns filed, 1,215,308 returns were audited, providing an overall audit rate of 0.93%.  This was just under a 21% increase over the 0.77% overall audit rate for the prior (2004) fiscal year. 

The overall rate may be somewhat misleading, however, since many returns are short forms without deductions and credits.  The statistical data provided more detail, allowing us to see which returns are currently the focus for audit. 

Returns with Earned Income Credit (EIC) - Low-income taxpayers receive a refundable tax credit based on income and number of children.  It has been identified by the IRS as one of the areas of taxes with significant fraud.  Of all returns audited in 2005, 42.9% were returns that included EIC.

Face-to-Face Audits - The IRS relies heavily on computer analysis to pick up on unreported income and overstated deductions.  They do this by matching W-2s, 1099s, escrow closings, broker statements, and a variety of other documents reporting taxpayer income and deductions. These computer-matching type audits are not included in the audit statistics.  The audits included in the statistics were only correspondence-type and face-to-face audits.  By utilizing correspondence techniques, they were able to minimize the number of face-to-face audits, which for 2005 were only 20.3% of the total.

Individual Return Audit Selection by Income - The IRS is generally selective and audits those returns with the greatest potential for providing the most additional tax revenue.  

Generally, audit rates have been on the increase over the last few years and are anticipated to continue increasing in the foreseeable future.