The IRS audits less than 1 percent of taxpayers every year. The prospect of getting audited concerns most taxpayers. In this article, we will discuss why the IRS audits people and who the IRS audits the most.
Why does the IRS audit people?
According to the IRS, “An IRS audit is a review/examination of an organization's or individual's accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.” The IRS conducts audits when it finds something wrong in a tax return or suspects an outright evasion of income.
What are the chances of getting audited?
The IRS uses random selection for tax audits. Its DIF (Discriminant Information Function) is designed to detect possible tax evasion cases. The system scans every tax return and selects the entities where it finds an anomaly. The DIF is regularly updated. Also, if you have had dealings with entities that have been selected for a tax audit, there's a high probability that the IRS will also audit your accounts.
If your income is very high, you don't report any income at all, or you use a lot of deductions, the chances that you will get audited are higher than individuals who have an average income. Also, the probability of getting audited is higher for businesses compared to individuals.
There are several triggers that the IRS looks for that can increase the probability of a tax audit. The triggers include:
- If you have high volumes of cash transactions.
- Claiming a lot of deductions when you file your taxes can result in an audit. Charitable donations, especially if they are larger than your reported income, are a red flag for the IRS.
- The IRS will investigate if you have overseas assets and income.
- Claiming a deduction for a home office can get the IRS's attention.
- If you don't report any income for which the IRS has information, you might get audited
- Window dressing and using round numbers in your tax returns might get your taxes flagged.
- If you own a business that mainly works in cash, you might get audited. Also, small businesses and freelancers have a much higher probability of getting audited than salaried individuals.
What happens when you get audited?
If the IRS decides to audit your tax filings, you will get a letter in the mail. The IRS never informs an individual about an audit over the phone. You shouldn't ignore an audit notice from the IRS. Individuals must fully comply with all of the requirements.
Here's how rigged the tax code is:— Bernie Sanders (@SenSanders) October 31, 2020
If you make less than $25,000 a year you are 9 times more likely to be audited by the IRS than a CEO who makes $30 million.
Meanwhile, the top 1% is responsible for 70% of the $381 billion in taxes that go unpaid each year. #TaxTheRich
There are three main types of IRS audits. For the mail audit, you don't have to meet the auditor, you only have to reply to the notices. Second, for an office audit, you will need to visit the IRS office in your area. Finally, if the IRS sees serious issues in your filings, they made conduct a field audit at your premises. However, field audits have dropped considerably over the last decade due to budget cuts at the IRS.
What are tax audit penalties?
Willful tax evasion is classified as a criminal offense. You could be jailed for up to five years for tax evasion. The IRS can impose a fine of up to $250,000 on individuals and up to $500,000 on corporations in the case of tax evasion. The cost of prosecution is recovered from the person or businesses that are guilty of tax evasion.