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What do we know about audits and IRS enforcement?

Since 2010, Congress has been asking the IRS to do more with less money. This has reduced the IRS’s audit resources by 28 percent, and the audit rate has fallen from 0.9% in 2010 to only 0.5% last year. And, the overall number of audits dropped by almost half over the same period.

Here are some other things Accounting Today found out about IRS audits and other enforcement:

The vast majority of audits are done by mail. In fact, about 75% of all 2018 audits were done by mail.

The IRS targets people who do owe money. In 2019, 89% of those audited ended up owing money.

Many people don’t even respond. In fact, according to the Taxpayer Advocate, nearly two-thirds of all mail audits never receive a response. When you do not respond to an audit by the deadline, the IRS simply assesses whatever tax it deems appropriate.

CP2000 cases are down substantially. Less than an audit, a CP2000 notice simply lets you know that the IRS thinks you have underreported your income. The average amount owed on a CP2000 notice in 2018 was $1,773. That said, the rate of these notices has dropped substantially from 2010.

Field audits are rare but rake in dollars. 2018 represented an all-time low in the number of field audits performed. These are typically reserved for taxpayers who owe enough money to justify the cost of the audit. How much do people end up owing? In 2018, the average owed after a field audit was $85,400.

The most common audit culprit? The EITC. Believe it or not, 50% of all audits involve someone who is claiming the Earned Income Tax Credit. That is true even though these taxpayers are among the lowest-income.

Partnerships and S corporations are less likely to be audited. S corps and partnerships have complex taxes, so auditing them requires a more experienced auditor. Unfortunately, the most experienced auditors are currently retiring in large numbers. This means that only one in every 455 passthrough entities was audited in 2018.

Accuracy penalties are on the rise. While both CP2000 notices and actual audits have dropped off, error notices have gone up. The number of individual taxpayers assessed an accuracy penalty for making a mistake on a tax return was 606,121 in 2018, up from only 58,366 in 2005. That’s a tenfold increase.

Prosecutions for tax evasion are down. In 2018, only 63 people were indicted for legal source tax crimes like tax evasion. That’s a 58% drop since 2013.

An audit may be rarer now, but it’s still a big threat. If you receive a notice from the IRS, contact an experienced tax attorney right away.

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