The fear of an audit is a driving force deeply engrained in the psyche of the American taxpayer. In fact, it’s the third biggest reason why people pay their taxes and do so honestly, according to the Internal Revenue Service, ranking only behind personal integrity and the fact that third parties already report certain income information to the feds. But is our fear ultimately warranted?
You’re far more likely to get audited than you are to win the lottery, get struck by lightning or be attacked by a shark – that’s for sure. But still, only 1% of individual taxpayers were audited in 2013, according to IRS data, which means the hype probably exceeds the actual risk when all is said and done. That would seem to be especially true this year, as recent budget cuts and the October 2013 government shutdown have seriously cramped Uncle Sam’s enforcement style.
Nevertheless, it’s unwise to take scarce IRS resources as an excuse to misreport and hope that you won’t be caught. It’s simply not right, and definitely not a risk worth taking. Just think about what happened to Al Capone, Willy Nelson, Wesley Snipes, Lauryn Hill and all of the other famous tax evaders. Sure, their celebrity likely resulted in increased IRS scrutiny, but as you’ll see below the IRS will ultimately catch up with you regardless of your social status.
WalletHub analyzed historical IRS data in order to determine how audit rates compare across tax brackets as well as between individuals, small businesses and large corporations. We also looked at historical audit results as well as incarceration statistics and even how the IRS enforcement division has changed throughout the years. You can find a complete breakdown of our findings below.
- For both consumers and corporations, the smaller the income, the higher the rate of tax evasion.
- Audited consumers who make less than $200K pay 83% higher penalties (as a percentage of adjusted gross income) than people making more than $200K.
- Audited corporations that earn $250K - $1M pay more than 11-times higher penalties (as a percentage of adjusted gross income) than corporations earning $10M - $50M.
- Individual taxpayers have a 1% chance of being audited. The individual audit rate has fallen more than 9% since 2010.
- Small businesses have a 1% chance of being audited. The small business audit rate has increased more than 17% since 2009.
- Large corporations have a 15.80% chance of being audited. The large corporation audit rate has increased 8.6% since 2009.
- Individuals making $10 million or more are 3,933% more likely to be audited than those who make $25,000 - $100,000.
- Corporations with more than $20 billion in annual revenue are 11,300% more likely to be audited than companies with less than $250,000 in revenue.
- 11% of individual audits result in no additional tax obligation, compared to 28% of small business audits and 27% of large corporation audits.
- The number of IRS agents dedicated to Examinations, Collections and Investigations has declined more than 12% since 2010.
- The annual number of incarcerations for tax crimes has increased more than 117% since 2003.
Audit Rates by Type of Taxpayer
Individual Audit Rates by Income Bracket
Corporate Audit Rates by Annual Revenue
Recommended Post-Audit Payment, As a Percentage of AGI (Individuals)
Recommended Post-Audit Payment, As a Percentage of Annual Revenue (Corporations)
Percentage of Returns Examined with No Change
Percentage of Audits Where There is Disagreement About Additional Tax Obligation
Number of Civil Penalties Assessed
Number of Incarcerations for Tax Crimes (2000 – 2013)
Mistakes & Enforcement Staff
Number of IRS Employees Dedicated to Examinations, Collections & Investigations
Most Common Taxpayer Math Mistakes, As a Percentage of Total Math Mistakes
- What are the best ways to avoid an audit?
- What are the best ways to handle being audited?
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Sources: The information used to construct this report is courtesy of the Internal Revenue Service, the U.S. Bureau of Labor Statistics and news reports.