Now that our tax season is ramping up, I thought it would be good to address the question that we get a lot: Will I get audited? Here’s the low down on IRS audits:
Statistically overall audit rates have actually declined in the last couple years. Not only have IRS personnel been spread thin to deal with implementation of Obamacare and preventing ID theft, among other things, but overall headcount at the Service is down from previous levels due to budget cuts.
However, if you fall in to certain categories, your odds of losing the audit lottery are high. If your income is in the seven figure range you can count on a 10% chance of being examined. If your income is less than that but greater than $200k, your odds are about 3% of being selected. If your income is less than $200k your overall odds of an audit are slightly less than 1%.
Certain items on your tax returns will increase the odds of imperial entanglements. Things like claiming real estate professional status, running a cash intensive business, showing a large loss for a sole proprietorship, and taking deductions disproportionate with your level of income all are red flags inviting scrutiny.
And woe be to the owner of a foreign bank account that failed to disclose it to Treasury! Many former safe banking havens are caving in to US demands to share information. When that happens, it results in an investigation, and the penalties for failing to disclose such investments are very steep.
Bottom line: with reduced resources the IRS is still able to focus on high probability targets. If you fall into these categories the time to prepare for the examination is now, not when you get the “Dear Taxpayer “ letter.

Read more tax articles from Paul’s tax blog