Much is made of the United States' voluntary compliance tax system.
The IRS depends on every taxpayer to honestly and accurately report his or her earnings and figure the correct tax due on the amounts.
Apparently, we agree with the self-reporting system, with most taxpayers saying cheating on taxes is wrong.
Of course, part of the reason we look askance at fudging Form 1040 figures is because we're afraid the IRS will catch us.
However, our fear of a tax audit might be exaggerated, according to the latest IRS Data Book.
Fewer return reviews: Audits, or examinations as they're called by the IRS, come in many forms.
The more common methods include correspondence audits, where the IRS looks over your return and it finds issues, sends you a written notice with its question, and field audits, which are face-to-face queries about your return.
In fiscal year 2018 — that's from Oct. 1, 2017, through Sept. 30, 2018, and detailed in the recently released IRS Data Book 2018 — the tax agency says all forms of its audits applied to only 0.6 percent of all individual income tax returns.
Since a fiscal year straddles two years, the IRS also noted audit figures for calendar year, the tax reporting period that individuals use in filing their annual 1040s.
In calendar year 2017, the IRS audited almost 1 million returns.
But that 1 million+/- is just a tiny portion of the just more than 150 million individual tax returns filed in calendar year 2017.
Specifically, using the IRS Data Book 2018 info, it breaks out as:
|
150,043,227 |
tax filers |
|
x 0.6 |
percent returns audited |
|
900,259.362 |
returns audited |
Those 900,259 (and a fraction) audited returns are this week's By the Numbers figure.
This latest audit rate is down 47 percent from 2010 and the lowest coverage level since 2002, according to the number crunching done by the Tax Policy Center.
Good audit news for most lower earners: And while all of us would like to make more money, our relatively paltry income protects us from extra IRS eyes.
For the most part, Uncle Sam wants his tax collector to spent time and energy going after big earners who can pay big tax bills on their money.
The following Data Book numbers break down the audit rates by income levels in the table below.
|
Individual Income Tax Returns Examined in Fiscal Year 2018 |
||
|
Size of adjusted gross income (AGI)* |
Percentage of returns |
Percentage of returns examined in |
|
No adjusted gross income |
1.68% |
2.04% |
|
$1 but less than $25,000 |
35.59% |
0.69% |
|
$25,000 but less than $50,000 |
23.65% |
0.48% |
|
$50,000 but less than $75,000 |
13.44% |
0.54% |
|
$75,000 but less than $100,000 |
8.66% |
0.45% |
|
$100,000 but less than $200,000 |
12.41% |
0.44% |
|
$200,000 but less than $500,000 |
3.72% |
0.53% |
|
$500,000 but less than |
0.58% |
1.10% |
|
$1 million but less than |
0.25% |
2.21% |
|
$5 million but less than |
0.02% |
4.21% |
|
$10 million or more |
0.01% |
6.66% |
|
*Adjusted gross income (AGI) is total income (including losses), as defined by the Internal Revenue Code, less statutory adjustments (primarily business, investment and certain other deductions). |
||
While lower incomes don't attract that much attention, at least according to the amounts shown in the 2018 Data Book, note that those 1040s with zero earnings do catch the IRS' eye.
In these cases, the tax collector wants to make sure that filers are accurately reporting their earnings or properly claiming tax breaks that reduce AGI to zip, zilch, nada, nil.
Some of the other relatively low AGI segments also get more attention that some richer taxpayers.
This is most likely because the filers in these income brackets claimed the Earned Income Tax Credit (EITC) and/or the additional child tax credit.
By Congressional mandate, the IRS must review these returns and hold until mid-February any refunds generated by these two refundable tax credits.
Disagreements, added refunds: Data Book 2018 also notes that of those almost 1 million return examinations, more than 22,000 taxpayers did not agree with the IRS examiner's determination.
The amount in dispute in these cases came to a recommended additional tax of almost $10.2 billion.
There also was some good news for filers.
Of the almost 1 million examinations of tax returns, almost 30,000 resulted in additional refunds to taxpayers totaling more than $6 billion.
You also might find these items of interest:
- Do you live in a tax audit hot spot?
- 10 things that will trigger a tax audit
- Tax audit odds are low, but if it happens be prepared
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