You probably have heard about IRS tax audits, right? An IRS tax audit is a review or examination of an organization’s or individual’s financial information to ensure that the provided information is precise according to tax laws and the tax amount is verified. A majority of the taxpayers visualize IRS audits as intrusive investigations regarding the criminal offense. But anything that questions the uncovered amount of tax in your financial data will categorize you under the tax audit or investigation.
The IRS has faced a major reduction in the audits as the audit resources have declined in the past decade. According to “The Wall Street Journal” ‘The Internal Revenue Service audited just 0.59% of individual tax returns last year, marking the seventh consecutive annual decline as the tax agency copes with smaller budgets and fewer workers’. However, the IRS has come up with 10 trends defining the current state of IRS audits.
Preference of mails in IRS audits
Most of the time the IRS audits are conducted using mails. The IRS reforms started this trend in the late 1990s and after that in 1998, the Internal Revenue Service audited 47 percent of taxpayers by mail. Nowadays, most of the small credits or deductions are audited using mail responses where the taxpayers submit the documentation and tax essentials to the IRS central campus location.
The basic challenge that taxpayers are facing is not an audit
The CP2000 Automated Underreporter notice is three times more common than an IRS audit. The CP2000 notice is not an audit because the IRS is not allowed to examine the taxpayer’s books and records. However, most of the taxpayers do not pay attention to the difference between an audit and CP2000 notice. The CP2000 program utilizes IRS information to discover the discrepancies which may result in proposing additional tax to the return. The average amount owed for a CP2000 notice in 2018 was $1,773. But the taxpayers are now a bit relaxed with the decline in automated underreported processes due to lack of IRS resources.
Earned Income Tax Credit errors are the major involvements in most of the IRS tax audits. Fifty percent of all the individual audits involve a taxpayer who claims EITC. There are cases when some of the politicians have criticized IRS for auditing low-income taxpayers and have concluded with EITC audit rates as their main evidence. When compared to other taxpayer profiles, the EITC taxpayers are more addressed in the tax audits than the small-businesses or individual taxpayers.
The graph below shows the rise in EITC recipient audit rate as compared to the individual audit rate.
IRS does not receive a response for an audit from a majority of people
The current status of IRS audit shows, the IRS audits actually lack response from a majority of people. According to the Taxpayer Advocate reports, almost two-thirds of the audit mails are left unresponded or unassessed by the taxpayers i.e the IRS just assesses the additional tax amount without the service’s participation. The least number of taxpayers agree to their mail audit adjustment and this leads to the rise in difficulty to make an appeal for readjustment in their tax audits.
The IRS knows who to audit
The IRS has actually started to change the rate of audits for all taxpayer types. In 2005, the audit rate has changed between 81% and 89% since 2005. The audit change rate was 89 percent for all taxpayer types in 2018. The IRS knows when and how to ask for returns in an audit.
The audit rate for rich has dropped
According to IRS the audit rates for the richer section of society are still popular but have gradually dropped within years. In 2011, one out of every eight taxpayers who earned more than $1 million in income were audited but the number dropped to one in every 31 taxpayers by the year 2018. However, the IRS has confirmed that those who earn more than $1 million are still among the most popular audit profiles.
Field audits are quite rare and expensive
Field audits are expensive but are quite rare, they are left for complex taxpayers and situations like businesses and tax avoidance schemes. According to IRS, more audits result in a greater return on investment and a large sum of money is lost to the U.S. Treasury when the audit rate is decreased. The year 2018 has had a lower number of $85,400 field audits. The IRS just conducted less than million field audits in the year 2018, making it less difficult for the taxpayers.
Be an S Corp or have a business partnership to escape audit
It is true that the S corp and businesses with partnerships have to face fewer IRS audits. The audit rates for S corps and partnerships both acquire a total percentage of 0.22, one in every 455 passthrough entities are examined. The total IRS data shows that the number of S corporations has increased from 38%. As more experienced IRS auditors are retiring and S corps are increasing, the IRS has to struggle more performing the investigations.
The penalties are usual even when the audit rate is dropped
The number of individual accuracy penalties has increased ten times since 2005. The number was 58,366 in 2005 while in the year 2018, 606,121 taxpayers were assessed for making an error filing tax return(audit or CP2000 notice). The IRS has now decided to penalize errors when auditing or sending CP2000 to the taxpayers in order to prevent future compliances.
Tax evasion prosecution is low
There is a major decrease in the number of IRS field auditors and criminal investigators. From 2013 to 2018, the number of special agents, as well as revenue agents, have declined by 21% and 26% respectively. As a result, the criminal investigation rate and indictments are declining. In 2018, there were only 636 tax source crime assumptions, but the result is gradually declining with years. The IRS tax evasion prosecution has declined with years and the criminal investigation cases have dropped by 58% since 2013.