Did you know the IRS has three kinds of audits? The most common is the correspondence audit, where the agency challenges your return in a letter. The next most common is the office audit, where you are invited to come to the nearest IRS office to defend your taxes. Finally, there is the field audit, where an IRS agent shows up at your doorstep to check on the details of your return.
These are all official IRS practices, but a surprising number of people never respond to audit demands. In fact, according to Accounting Today, taxpayers fail to respond to two-thirds of all correspondence audits. When you don’t respond to an audit, you lose by default and the IRS gives you a bill that you have little choice but to pay.
Audits aren’t the only way the IRS can challenge your return. In fact, the most common way the agency challenges returns is through a CP2000 Automated Underreporter notice. These are three times more common than other types of audits. A CP2000 notice typically indicates a discrepancy between what you reported as your income and what an employer or other reporter noted down. Although the CP2000 process is less intrusive than a traditional audit, the average amount taxpayers owed in 2018 on these notices was $1,773.
Audit rates are going down but could rise again
Accounting Today found that all types of audits are on the wane due to years of short budgets at the IRS. In 2010, the IRS audited 0.93% of all taxpayers. Last year, that number was 0.51%. CP2000 reports are also on the downswing.
That said, Congress recently increased the IRS’s budget for audits, so we may see a reversal in this trend.
Moreover, most audits result in extra taxes being owed. Last year, the percentage of audits resulting in adjustments was 89%. It hovered in the high eighties for most of the last decade. The average amount owed after a mail audit was around $7,000, while the average amount owed after a field audit was a whopping $85,400.
A red flag and a green flag
One interesting thing Accounting Today discovered was that there is one area where audits are quite common: the Earned Income Tax Credit (EITC), which is available to certain low-income taxpayers. Even though it’s arguably less effective to audit low-income taxpayers, the IRS audit rate among EITC claimants has remained relatively steady despite declining audit rates overall. If you rely on the EITC, be careful to claim it correctly and accurately.
The green flag? Partnerships and S corporations have much lower audit rates than average.
For specific help with an audit or other IRS challenge, contact an experienced tax attorney.