Continuing a downward trend from the prior year, the IRS audited 7% fewer tax returns in 2018 than they audited in 2017. Of the 150 million personal tax returns filed for the 2017 tax year, only 892,000 were audited – a meager 0.59% of all personal tax returns being filed. That rate is the lowest since 2002.

The percentage of tax returns subject to a live field audit was even more meager – with only 169,000 audits resulting in a live meeting between an IRS agent and a taxpayer or the taxpayer’s representative. The remainder of the audits were via computer generated letters sent to taxpayers by the IRS based on discrepancies uncovered by the IRS’ matching program where data filed by employers and financial institutions are compared with income reported on everyone’s tax returns.

Why the continued decrease in IRS audits? The primary reason is due specifically to their budget. In 2010, the IRS’ operating costs slightly exceeded $14 billion. Since that time, the IRS has seen their budget slashed by 17%. A smaller budget has resulted in a smaller IRS work force available to conduct IRS audits. In fact, there are now 15% fewer IRS employees than there were in 2013.

Even with a shrinking workforce, the IRS was able to assess an additional $9.1 billions dollars of federal income taxes for 2017, or approximately $10,000 per audit. The 2017 personal tax returns most scrutinized by the IRS in 2018 were as follows:

  • 2.2% of tax returns that included a Schedule C (sole proprietor)  reporting gross receipts in excess of $100,000.
  • 3.2% of tax returns reporting total income in excess of $1,000,000.
  • 3.4% of International tax returns that were filed.

The lowest audit rate in 2018 were audits of S-corporation and partnership tax returns. Business owners filed nearly 9 million tax returns for 2017 in this category. The audit rate for these tax filings was only 0.2%.

However, this low rate for these business tax returns is expected to change in the near future. The IRS plans to increase audits of shareholder basis that are recorded as part of these tax returns. The IRS’ concern is a lack of taxpayer compliance regarding shareholder distributions and shareholder pass through losses which may be limited if they are in excess of basis. Both of these items result in an under-reporting of personal income by taxpayers.

Will the downward trend in audits continue? Unless, the IRS’ budget is increased in the next few years, taxpayers can breathe a sigh of relief as there shouldn’t be much of an uptick in the audit rates of tax returns in the near future.