Tax Day may have been pushed back a couple months, but Americans' fear of getting audited is surfacing right on schedule.
Earlier this year, the IRS delayed the deadline for filing individual income taxes to July 15 due to the coronavirus crisis. In the meantime, the agency has been totally slammed sending out some 160 million stimulus payments — to the extent that it briefly stopped answering the phones. It's an understatement to say there's a lot going on.
But should you still be afraid of getting audited?
Mark Steber, Jackson Hewitt’s chief tax information officer, said it’s not unusual for your blood to run cold at the thought. A recent Money/Synchrony survey found that 35% of women and 21% of men dread tax time.
However, maybe you don’t need to be among them. First of all, Steber pointed out that the IRS doesn’t do that many audits. In the fiscal year 2018 — which involved 2017’s taxes — there were 196 million tax returns filed. The IRS audited about 1 million of them, which shakes out to a mere 0.5%.
If that seems tiny, that’s because it is. The number of people getting audited has been dropping drastically over the past couple of decades. (For comparison’s sake, in the 1970s, the IRS audited roughly 2.5% of individual returns.) There are several reasons for this decrease, but the short explanation is that its staff and budget are way smaller these days.
“The IRS has gotten pretty good at figuring out who owes,” Steber says. “They generally know who they’re looking for.”
Where you live and how old you are don’t matter. Audit rates are the highest for people reporting no income or those making $500,000 or more.
Steber adds that technological advances mean the IRS can match up data and catch errors on tax returns. The agency also knows what people in your income bracket are doing with their money. So if you make $1 million a year and your profile looks way different than everyone else who’s making $1 million a year, there’s probably an issue.
“It’s not an age, not a location. It really is a level of transaction,” Steber says. “The more activity you have — higher wages, self employment, transactions, rental property — the more likely it is you’ve made a simple mistake or taken an aggressive position.”
He said there are basically three buckets of audits. The first is a harmless mistake — as in, you accidentally left off a couple hundred bucks from a job you worked at three weeks and later forgot about. The second is a misunderstanding of a rule — you didn’t grasp the way your cryptocurrency should be reported, for example. And the third is an intentional move — you wrote off your Ferrari as a business expense when you really just used it for lazy Sunday drives.
Jason Fleetwood, tax partner at CohnReznick, added that sometimes people get audited in connection with another examination. Perhaps you had a business partner whose return is under scrutiny, and the IRS is now looking at yours for good measure.
He also said that audits often don’t involve meeting with an IRS agent face to face. The majority of examinations are called correspondence audits, which means they’re handled entirely by mail. The agency will ask you to pull backup records together — W2s, charitable contribution receipts, mortgage statements — and send copies to the IRS.
It’s all in the name of keeping people honest.
“Don’t get alarmed,” Fleetwood adds. “The first thought that a taxpayer has is ‘I did something wrong,’ but that’s not the case. Just because you’re selected for audit doesn’t mean there’s a problem with your tax return.”
Bottom line: You don’t need to live in fear of an audit. Your chances are low, and the process isn’t too painful if you do get selected. Much of it happens by mail; it just requires you to produce documents that support your tax return.
Alas, the coronavirus crisis isn’t a get-out-of-jail-free card. The pandemic may have shifted priorities at the IRS, but Steber predicted the agency will probably do the same amount of audits for 2020.
“Audits are kind of timeless. They get popped up on the computer, they sit there in inventory, until somebody comes back to work,” he says. “Don’t panic, respond timely, and get some help.”