Worried about getting audited? You're not alone! In 2016, just over 1 million individual income tax returns were audited.
The good news is that this is a 16% decline from 2015 and a drop of ~35% since 2011. Overall, the individual tax return audit rate of just 0.7%, the lowest in more than a decade.
In 2020, with all that's going on in the world with the lockdowns, tax-filing delays, coronavirus, riots, and so forth, I highly doubt the audit rate will tick up.
The majority (71%) of these were correspondence audits were conducted through the mail, rather than some nerdy looking fella knocking on your door, forcing you to show him or her all your paperwork.
These mail correspondence audits are generally the result of a straightforward math error, income omission, or miscalculation, and can often be completely resolved by either sending documentation to the IRS, or if any additional assessment is legitimate, by sending a check to the IRS.
I've personally gotten a a mail correspondence audit because I forgot to put the cost basis of some stock sales one year. The IRS thought I had made over a million bucks, when actually, I had only made about $10,000 because I was trading in and out of stocks so much.
Finally, 37,000 of all audited returns actually resulted in an additional refund to the taxpayer. For those of you who do your taxes yourself, there's a good chance you might be doing them wrong and owing too much. You can potentially think of an audit as a free way for the foremost expert to review your taxes.
Audit Rates By Income Chart
Here is a table by the IRS highlighting the audit rate percentage by income. As you can see, audit rates go up the more you make, which makes sense given the IRS is resource constraint. You might as well bust one person making $10,000,000 rather than audit 100 people making $100,000.
Why Are Audit Rates Declining Overall Over Time?
Besides the IRS receiving less and less funding to reviewing tax returns, another possible reason for the lower audit rate is that more people took advantage of IRS assistance.
More than 68.3 million people utilized IRS telephone assistance, an increase of 11.4% year over year. Most significantly, the number of people who used live telephone assistance rose by an impressive 40% to 25.5 million people. In total, the IRS spend just over $2.4 billion on taxpayer services last year, almost 8% more than in 2015.
I've personally called the IRS and received assistance from their Ogden, Utah center. The person was so helpful and so nice. The IRS knows their tax rules are complicated, and mistakes will happen. Therefore, the least they can do is help.
The IRS has also continued to develop new tools on their website, IRS.gov, to help tax payers figure out how much they owe and how to do their taxes. They've even produced YouTube explanatory videos for all of us to watch.
Taxes Are Complicated, Do Your Best
At the end of the day, do your best to do your taxes right. The IRS understand there are a bunch of different things that could go wrong. You might add in an extra zero by mistake. You might forget to input your cost basis for some stocks you sold. You might deduct your mortgage interest twice due to the confusion of rental property and your primary residence.
Recommendation To Build Wealth
Manage Your Money In One Place: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.