The IRS has updated its audit guidelines, including the section on audit selection. It simplifies, or tries to simplify, the answer to one of life’s greatest mysteries - what are the chances of you being selected for a tax audit?
There are no doubt triggers such as outsize or oddball deductions that are well above the average for your tax bracket.
However, returns may still be selected for audits even if there’s no such red herring or error. You could end up being audited due to any of the following:-
- Lousy Luck - The system randomly picks returns based on a statistical formula which has nothing to do with what’s in the returns.
- Document Matching – If the information you report doesn’t match what’s on payor forms such Form W2 or Form 1099.
- Business Partners – If your business partners of investors with whom you have extensive transactions have been selected for an audit, then you may be roped in for one too.
So let’s say you have done everything by the book and there’s nothing wrong with your returns, but there’s still a chance that you could be audited. What do the statistics say about this?
Well, depends on the adjusted gross income you show. According to an analysis published by Nolo.com, the lowest chance (0.73%) of being audited is in the $25,000 to $50,000 range.
It’s still at or below 1% for the expanded range of $25,000 to $200,000. It goes up to varying degrees as your income exceeds or falls below this range.
For example, if you show some income less than $25,000, there’s a 1.22% chance that you could be audited. If you show no income whatsoever, it’s all pain and no gain because your chances of being audited actually goes up to 3.42%.
At the other end, it really starts climbing after $5 million. For those with incomes in between $200,000 to $500,000, the chances of being audited are still only 2.66%.
It’s 5.32% up to $1 million and goes up marginally to 5.38% for those with incomes between $1-5 million.
For those with incomes in between $5 to $10 million, there’s a one in 20 chance that you’ll be picked for an audit from among this group.
For those whose incomes exceed $10 million, the chances of an audit go up to one in three.
Photo credit – house.gov