Do This and Dramatically Reduce Your Chance of IRS Audit


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In the past 7 years, the IRS’s budget has been slashed by $2 billion. Normally, that would be a cause of celebration for American taxpayers. And, it still is, if you’re in the right type of audit class. If you’re not things can get very sticky.

There are now 1/3 fewer auditors then the IRS had in 2010. Again, normally that would be a cause for celebration. But, keep reading.

Without enough staff, the IRS has stopped basic functions. If you have a tax question, you’re not going to get an answer. They’ll tell you to ask a professional. If you have to call them, be prepared for a wait of up to 4 hours on hold.

And, interestingly enough, the rate of audits has dramatically changed.

If you make less than $25,000 per year, there has been no change in the number of audits. The quality of them, though. That has changed. These are now largely initiated by computer generated programs. That means if your return and the information that is requested don’t exactly fit the parameters, problems can escalate quickly. It appears that the IRS is purposely targeting people who are less likely to have professionals representing them. And, of course, this class of returns are easier for a computer to audit.

If you are targeted for a computer audit, you will get a list of items to prepare and then send in. The information needs to be mailed or faxed. Make sure you have proof that you have complied. It’s not uncommon for the information to be lost and then you’ll be blamed for missing a deadline. Of course, if that happens, you’ll be sent the call hold queue limbo while you wait to talk someone.

There has been a drop in audits of people who make $200,000 – $500,000, because the IRS is assuming that if you’re one of them, you’ll primarily make your income as W-2 income, capital gains, and interest and dividends.

At the other end of the spectrum are off shore entity audits. They are complicated, take a lot of time and require more sophisticated auditors. One change that the IRS made as they had big budget cuts was to allow auditors to select who they wanted to audit and to judge them based on how many audits they closed. That meant they were likely to focus on the easiest audits possible. If it looked too complicated, it would take too much time and that could mean a bad evaluation

Less budget meant less hiring and little money for training. Training consists of sitting in front of a computer screen for weeks. The best and the brightest leave shortly thereafter, out of sheer boredom.

The IRS has also fallen further and further behind in collecting on tax debts. Tax debt has a statute of limitations of 10 years. So there is often a real possibility that tax debt may just get forgotten.

In 2018, the funding for the IRS has been increased again. However, the massive new tax laws have dumped a lot of extra work on the IRS.

Out of all of this, there is one thing that is true. Corporations are a whole lot less likely to be audited. Businesses are much less likely to be audited.

Start a business. Form the right business structure for your circumstances.



3 Comments

  1. Helen Donnell says:

    Do you know what proportion of audits under $25k income involved Earned Income Credit? I know that’s been an audit target, as it should be considering how much fraud goes on.

  2. Diane Kennedy says:

    As of today (12/24/18), the IRS is not working due to the government shut down. I believe that when they do go back to work they are going to concentrate of their “Dirty Dozen” and the easier audits. Of course, that doesn’t mean something outside those two categories is completely free from audit risk, but it means the odds are less you’ll get selected.

    If my belief is correct, that means the checkbook LLC would be at lower risk than in previous years.

  3. Joel Davidson says:

    Good article. What does all this mean for Profit Share Plans inside of LLC’s and self directed checkbook IRA’s in LLC’s that invest in real estate?

    Would it be safer now to just move all of these into ridged custodians for all IRA’s & Roth IRA’s (eg Equity Trust)?

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