The Internal Revenue Service audits individual and business tax returns to identify possible instances of noncompliance with tax law. Usually, selection for an audit means that the IRS believes you might have under-reported your income or over-reported your credits or deductions, resulting in an underpayment of taxes. Although an audit can work in a taxpayer’s favor by identifying a refund, in many cases, the audit results additional taxes due. In 2009, IRS audits resulted in an additional $17.4 billion in tax revenue collected. But there’s good news: your chances of being audited are relatively low.
Chances Of Individual Audit
The IRS keeps records of how many examinations, or audits, it performs each year. For the 2009 tax year, the IRS audited 1.4 million individual taxpayer returns out of the 139 million returns filed, meaning that overall, an individual taxpayer had about a 1 in 100, or 1 percent, chance of getting audited in 2009. This number has remained the same since 2005; prior to that time, your chances of an audit were lower.
Breakdown By Individual Income
Individual income matters when it comes to audit selection. People who earned more than $1 million had the greatest chance of getting audited in 2009, with the IRS examining 6.4 percent of returns in that income bracket. Those earning between $200,000 and $1 million had a 2.9 percent chance of getting audited, and those with incomes under $200,000 had about a 1 percent chance.
The more money your business earns, the more likely your business tax return is to be audited. Overall, businesses stood a 0.58 percent chance of being audited in 2009. Corporations with assets greater than $10 million were audited most often, with 14.55 percent of those returns examined by the IRS. In contrast, corporations with assets of less than $10 million had only a 0.85 percent chance of audit. Partnerships and Subchapter S corporations had about a 0.4 percent chance of being audited.
How Returns Are Selected
The IRS selects tax returns for audit in one of several ways. The Discriminant Inventory Function System, or DIF, uses a numeric score to identify tax returns for potential audits. The IRS might select your return if the information you report does not match 1099 or W-2 forms received by the IRS from third parties. Questionable treatment of items such as credits and deductions can trigger an audit. If the IRS receives information regarding potential problems with your return, it might choose to examine the return. The possibility that your return will be selected is greater if you report income or expenses from activities such as construction or farming, where particular issues with tax law frequently arise.
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- Purpose of Auditing Financial Statements
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