Although the IRS actually audits very few tax returns as a percentage of the total returns filed each year, it is the very real chance of an audit that helps ensure voluntary compliance with the law.
Audit Statistics for 2008
The IRS' annual data book for fiscal 2008 reports that the IRS collected $2.3 trillion in taxes and processed 250 million returns during the period. 101 million of those returns were filed electronically.
The data book also provides the following audit statistics:
Individuals Of the nearly 138 million individual income tax returns filed for 2007, 1,391,581 of them were audited during fiscal year 2008, or approximately 1%.
S Corporations The audit rate for S corporations was 0.4%, which is down from 0.5% for 2007.
C Corporations For corporations with less than $10 million in assets, the audit rate was 1%, or 0.1% higher than the prior year. While the rate was much higher for larger corporations―i.e., those with $10 million or more of assets―it is actually declining. It was 15.3% for 2008, as compared to 16.8% for 2007.
Partnerships For partnerships, the audit rate remained the same as for the previous year, at 0.4%.
Potential Audit Triggers
So, how were these audit targets selected?
As you might guess, returns with math errors or missing information are subject to additional scrutiny. Also, the higher your income, the greater the likelihood you will be audited. High-income non-filers are especially hot targets for the IRS. If you've been audited before and the examiner found that you owed additional taxes as a result, you're also at higher risk. The IRS also selects returns for audit on a random basis.
However, most returns selected for audit are initially flagged by a confidential computer program at the IRS referred to as the discriminant function system, or DIF. It is believed to flag returns with items that differ significantly from national norms, require proof or explanation, or are on an IRS list of hot tax issues.
Your chances of being audited by the IRS tend to be greater if your federal tax return includes any of the following items:
