What are my odds of being audited?

Audit coverage rates are at low levels, the IRS has reported. According to the IRS, the audit coverage rate for individuals fell 16 percent from FY 2015 to FY 2016. The 0.7 percent audit coverage rate for individuals was the lowest coverage rate in more than a decade, the agency added.

Selection Process

The raw audit numbers, of course, do not answer the more specific question regarding “my chances of being audited by the IRS.” The IRS does very little random selection of returns for being audited these days. Computer analysis flags certain suspect items but, there again, randomly. For example, taking the home office deduction increases a taxpayer’s odds of an audit on the item, but odds remain that it still will not be pulled for audit. Another “audit trigger” is not reporting income for which an information return (Form 1099-MISC, for example) has been generated.

Audit campaigns. The IRS Large Business and International (LB&I) Division has revealed new corporate compliance campaigns. The campaigns, as explained by LB&I, offer "a holistic response to an item of either known or potential compliance risks." Whether "audit campaigns" will be initiated within the other major IRS divisions in part will depend upon the success of the LB&I division's rollout. So far, IRS leadership appears optimistic over its prospects.

The campaigns currently address:

  • Code Sec. 48C energy credit;

  • Offshore voluntary disclosure program declines and withdrawals;

  • Code Sec. 199 domestic production activities deductions;

  • Micro-captive insurance;

  • Related-party transactions;

  • Deferred variable annuity reserves and life insurance reserves;

  • Basket transactions;

  • Completed contract method of accounting;

  • TEFRA linkage plan strategy;

  • S corporation losses claimed in excess of basis;

  • Repatriation;

  • Form 1120-F Nonfiler.

Automatic Underreporter Program. The IRS reported that the Automatic Underreporter Program continues to generate significant revenues. The agency closed more than 3.5 million cases under the Automatic Underreporter Program, generating some $6.8 billion in additional assessments. Further, the IRS closed nearly 400,000 cases under the Automatic Substitute for Return Program, generating some $600 million in additional assessments.

Comment. Intertwined with audit selection are the shrinking resources available to the IRS to conduct audits. President Trump has proposed a $239 million reduction in the IRS's budget for fiscal year (FY) 2018.

Audit Coverage Stats

Individuals. The audit coverage rate for individuals for FY 2016 was 0.7 percent. The audit coverage rate increased for higher income taxpayers: 1.7 percent for returns reporting more than $200,000 in income and 5.8 percent for returns reporting more than $1 million in income. Nearly 800,000 of individual audits in FY 2015 were correspondence audits. Some 240,000 were field audits. In total, the IRS audited roughly 1.03 million of the nearly 148 million individual returns filed.

Corporations. The audit coverage rate for corporations (excluding S corps) for FY 2016 was 1.1 percent. Here, more audits were field audits than correspondence exams. Some 19,000 were field audits and roughly 1,800 were correspondence audits.

Partnerships and S corps. For partnerships, the audit coverage rate for FY 2016 was 0.4 percent. The IRS audited roughly 15,000 of the 3.9 million partnership returns received. The audit coverage rate for S corps for FY 2016 was 0.3 percent. Of the approximately 4 million S corp returns received, the IRS selected some 16,000 for audit.

Steve Mossaudit, audit coverage rate, IRS