The true IRS audit rate is higher than you think. Every year the IRS tells Americans the audit rate in the U.S. is “low and getting lower,” but they’re not telling taxpayers the entire truth.
It is for this reason that your clients are showing up in your office under the impression that their chances of being audited are far lower than is true. The IRS claimed in their most recent published audit rate statement, the 2017 Internal Revenue Data Book, that the audit rate for fiscal year 2017 was a mere 0.5%. What the IRS fails to mention is their narrow definition of what constitutes an audit.
According to the IRS, roughly one million taxpayers are audited every year (aka a “real” audit). But as tax professionals, we know the IRS will never tell a taxpayer in a written notice that they are being “audited.” Instead, the IRS uses the word “examination.”
The reality is an “examination” is an audit. An examination includes three categories of IRS compliance: correspondence audits, office audits, and field audits. However, this way of classifying misrepresents the “true” audit rate because the rate cited by the IRS only includes activities which are on the decline, but not any of the other types of correspondence the IRS sends out that are not categorized as examinations.
If you include in the audit rate all of these other compliance activities like Automated Underreporter (AUR) notices, math error notices, and identity and wage verification notices, the number jumps up to roughly 6.3 percent, affecting 9.1 million taxpayers according to the most recent available data from 2016. Taxpayers need to know what the true audit rate is, so they don’t underestimate the likelihood of having an experience that feels just like being audited – and blame you.