For a variety of reasons beyond the scope of this blog today, the IRS audit rate has been on the decline the past few years. In 2017, the audit rate was 0.6% or one out of every one hundred and sixty-seven returns. This, however, is just the national average.
Certain types of returns get more attention from the IRS. For example:
- 4.4% of tax returns reporting incomes of at least $1mil were audited by the service in 2017.
- Schedule C filers with incomes between $200,000 and $1mil had an audit rate of 1.6%
- About 1% of filers who claim the earned income tax credit are audited.
- C Corps are also audited at about a 1% rate.
- Exam rates for partnerships and S Corps were 0.4% and 0.3% respectively.
Anecdotally, I can say over the course of my career that the IRS has certain trends in its audit selection process. I think the most likely taxpayers to be audited are those with a Schedule C who report losses for multiple years in a row. Particularly Schedule C businesses that have a personal enjoyment component like golf instructor, artist, etc. are a good audit candidate in my opinion. Basically, anything that seems like a hobby. If a Schedule C business has high travel costs or high meals and entertainment costs deducted on the return, then I think that is also a red flag for the IRS. I don’t have any data to back-up that opinion, just what I have seen over the years.
However, it makes sense that because of the IRS’ limited resources they just go after the low hanging fruit. And indeed, the statistics support that they are more successful with individual audits versus entity audits. In 2017, 43% of partnership exams, 31% of corporate field exams, and 29% of S-Corp audits result in no change while only 8% of individual field exams result in no change.