The decrease in IRS audits over the past few years has many assuming their chances of being audited have also decreased. Although this is true for most taxpayers…it is not the case for those over-estimating expenses or under-reporting income.
If you’re not already aware, the IRS’s budget has continued to shrink year after year. Since 2010 the IRS has seen an 18% decrease in their budget and over 11,000 people from the enforcement staff being let go. That’s nearly a quarter of the staff that is there to conduct audits and enforce collection action. Because of the shrinking staff, the IRS allocates its remaining resources to the returns likely to produce the largest amount of additional tax assessments.
HOW MANY RETURNS WERE AUDTED?
First, we take a look at the percentage of tax returns filed for the 2015 and 2016 tax years that were actually audited. Specifically, we pulled data about individual business returns not claiming the Earned Income Credit (“Self-Employed Returns”) and all individual returns claiming the Earned Income Credit (“EIC Returns”).
- In 2015 0.70% of all individual business and nonbusiness tax returns that were filed were audited and in 2016 that number shrunk to 0.62%.
- 1.28% percent of Self-Employed Returns were audited in 2015, decreasing in 2016 to 1.15%.
- The percentage of EIC Returns audited was 1.53% in 2015 and 1.37% in 2016.
These numbers give us a better understanding of what the decrease in the number of audits truly looks like but, it doesn’t quite give us an accurate picture of whether the IRS is becoming more efficient in who they are selecting to audit. Let’s see what the actual tax amounts being assessed look like for 2015 and 2016.
HOW MUCH MONEY WAS ACTUALLY ASSESSED?
- Total recommended additional tax for individual business and nonbusiness returns in 2015 was $9,864,674,000 in 2016 it was 9,028,417,000.
- Total recommended additional tax attributed to self-employed returns in 2015 was $2,784,634,000 and in 2016 was $2,648,710,000.
- Total recommended additional tax attributed to EIC returns in 2015 was $2,221,007,000 and in 2016 was $2,015,282,000.
So, what does this all mean? Overall, there was a decrease in the amount of recommended additional tax. However, what do these number truly mean for individuals filing a self-employed return or claiming the Earned Income Credit?
HOW THIS AFFECT SELF-EMPLOYED RETURNS AND RETURNS CLAIMING THE EARNED INCOME CREDIT
Well, we actually see the percentage in the amount of recommended additional tax for self-employed returns (when compared to the overall number of recommended additional tax) INCREASE from 28.23% in 2015 to 29.34% in 2016. Also, for EIC returns the recommended additional tax (when compared to the overall number of recommended additional tax) only decreases from 22.51% in 2015 to 22.32% 2016.
This indicates that although the IRS is unable to audit as many returns as in previous years, they are consistently focusing on individual returns that claim the EIC. More importantly, the increased percentage in recommended additional tax for self-employed returns mean the IRS is scrutinizing these returns more than ever. The reason being is that based on previous years these types of returns consistently have errors and yield a large portion of the total recommended additional tax.
Don’t be fooled by the decreased number of audits by the IRS. If you are self-employed or are claiming the Earned Income Credit and are not accurately reporting your income, expenses, or deductions, the likelihood of you being audited is much higher than overall rates would suggest. Be sure to keep good organized records of what you report on your tax return. Just because the number of returns being audited overall has decreased doesn’t mean the IRS audit process is any less stressful or easy.
If you have several items you will be including on your tax return (multiple income sources either earned or unearned, itemized deductions, a Schedule C, etc.), it is probably in your best interest to find a tax professional to prepare the return for you. This will help in reducing your chances of being audited, allowing you to avoid the hassle of having to experience exactly what it means to be audited by the IRS.