The fear of being audited by the Internal Revenue Service (“IRS”) looms large for many taxpayers. The IRS releases general statistics regarding audits, but how much do these numbers truly reveal about an individual’s chances of being audited? This article will delve into the most recent IRS statistics, explore their implications, and provide an informed understanding of the audit rates in light of IRS practices.
The Misleading Nature of IRS Statistics
The IRS statistics show that less than 1% of individual taxpayers were audited in the fiscal year 2006. One percent is not a lot of audits.
While this number may seem reassuring, it is important to remember that these statistics can be misleading without proper context. For example, there are significantly more lower-income taxpayers than higher-income taxpayers. However, the statistics reveal that higher-income taxpayers were audited more frequently than lower-income taxpayers.
This does not necessarily mean that wealthier individuals face a higher audit risk. It may simply indicate that the IRS focuses on taxpayers who have experienced a one-time windfall, such as an inheritance or the sale of a business. The IRS goes where the money is.
It should also be noted that the audits of lower-income taxpayers usually focus on just a handful of issues, such as claiming head of household status, earned income tax credits, etc. These audits are not the grueling full-body examinations that most Americans fear. They usually consist of exchanging one or two letters with the IRS via a correspondence audit. Some would not even call these lower-income audits real audits. This also has to be considered when evaluating the IRS’s statistics.
Individual vs. Business Audits
The statistics also indicate that individual taxpayers are audited more frequently than business taxpayers. Again, the IRS goes where the money is.
Even this distinction may not be as clear-cut as it seems. Many businesses are owned by individuals, and the IRS may conduct a limited review of a business as part of an individual audit. This is particularly true for sole proprietors and single-member LLC owners who report their business earnings and expenses on Schedule C on their personal tax returns. The same goes for small business owners who operate as partnerships and S corporations.
The statistics do not reveal how these cases factor into the overall numbers. Are they treated as individual audits or business audits?
IRS Enforcement Actions
The statistics also show that IRS enforcement actions, such as liens and levies, have increased in recent years. This too can be misleading.
A tax lien or levy does not mean that the IRS actually collected anything. The lien is just a public filing that evidences that there is a tax debt. Unless the IRS levies by enforcing the lien, the tax lien has no meaning. A similar situation arises with respect to IRS levies. Just because the IRS issues a levy notice, the notice may not result in any funds being paid to the IRS. Consider the taxpayer who has a bank account with $20.00 in it. The IRS may levy on this account and five other bank accounts that the taxpayer already closed. The net result of the IRS’s six levies would only be $20.00.
And the IRS’s figures do not account for IRS errors or changes in enforcement practices. For example, the IRS has been known to impose liens and attempt to levy taxpayer assets even when no tax is due. While these levies may have resulted in money being paid to the IRS, it is often money that the IRS has to turn around and give back to taxpayers.
While IRS statistics provide some general information about audits, they may not paint a complete picture of an individual’s audit potential. Factors such as income level, business ownership, and enforcement trends can all influence the likelihood of an audit. Taxpayers should be cautious when interpreting these statistics and consider seeking professional advice to better understand their unique situation.
In conclusion, it is important to remember that IRS statistics can only provide a limited understanding of the audit process. To truly gauge your audit potential, it is essential to consult with a knowledgeable tax attorney who can help you navigate the complexities of the tax system and minimize your risk of an audit. By seeking expert guidance and understanding the limitations of IRS statistics, you can make more informed decisions and feel more confident about your tax situation.