Getting audited by the IRS sounds like a nightmare for many small business owners. While getting audited is certainly not the best-case scenario, the auditing process is actually much different than most entrepreneurs think. In this article, we’ll be sharing ten surprising truths about IRS audits.
Most Audits are Conducted by Mail
According to Tax Pro Today, about three-quarters of IRS audits are conducted by mail. This method of auditing certainly feels much less invasive than the scenes we see portrayed in television, where an IRS employee questions an offending taxpayer in person, pouring over documents to determine where the infractions occurred. In reality, if you get audited by the IRS, it is likely that you will only have to provide a response with documentation by mail.
Earned Income Tax Credit is the Biggest Issue in IRS Audits
About half of IRS audits involve EITC, which primarily affects lower-income taxpayers. To read more about EITC requirements, you can click here.
The Majority of People Don’t Respond to Audits
According to The Taxpayer Advocate, about two-thirds of mail audits go without a response. In these cases, the IRS will just assign additional taxes. This means that the taxpayer forfeits their ability to appeal against the decision.
You are More Likely to Receive a CP2000 Than Be Audited
You are three times more likely to receive a CP2000 Automated Underreporter notice than a notice of audit. The automated program searches for differences between your W2s, 1099s, and filed return and may assess additional taxes if there are discrepancies found.
The IRS Is Good at Targeting Which Taxpayers to Audit
In 2018, the IRS’s audit change rate was 89%, meaning that the IRS correctly predicts when an audit will result in an adjustment the vast majority of the time.
Field Audits are Rare and Costly
Field audits, like those commonly shown in media, are very rare. This is because the average cost of a field audit is $85,400. Therefore, fewer than a quarter of a million field audits took place in 2018, according to Tax Pro Today.
S Corps and Partnerships are Difficult to Audit
S Corps and partnerships are difficult to audit, with fewer than 1 out of 400 S Corps or Partnerships triggering an audit.
Audits on the Wealthy Are Declining
While Audits on the millionaire and above class are still some of the most popular, their rate is declining. In 2008, 1 in 8 millionaires was audited by the IRS. In 2018, this number dropped to 1 in 31.
While Audits Are Dropping, CP200s are Increasing
The rate of those audited has dropped in the past several years, but the volume of CP2000s issued has risen dramatically, averaging out the amount of penalties year over year.
Criminal Investigations and Indictments are Low
While fear of IRS audits is still high, the truth is that tax evasion prosecutions are declining, with only 636 indictments in 2018.
In understanding the truth behind IRS audits, entrepreneurs can form more realistic expectations of what to expect in the event that they are contact by the IRS. In order to avoid being audited or receiving a CP2000, you should work closely with your bookkeeper and tax professional to make sure that all of your financial records are in order and are being reported correctly.