Writers are often concerned about their risk of audit, and rightfully so. An audit can not only be timeconsuming,
but the process can also be extremely stressful. So what are your chances of being audited? Data
from IRS audit activity for 2011 provides some clues.
Of the total 140,837,499 individual tax returns filed in 2011 for the 2010 tax year, 1,564,690 were audited.
Thus, the IRA audited approximately 1.1 percent of the total individual returns.
Of these audited returns, 30.9 percent claimed an Earned Income Tax Credit, which is a tax benefit for
certain taxpayers who earn modest incomes. The fact that such a high percentage of the audited returns involved
this credit is not surprising given the increase in fraud related to this credit.
The majority of individual returns that were audited involved returns showing total net income of
$200,000 to $1 million. Of these returns, 3.2 percent were audited.
The audit rate of business returns with gross revenues between $100,000 and $200,000 was 4.3 percent,
which was a decrease from 4.7 percent in 2010. The audit rate for individual returns with total income between
$200,000 and $1 million that showed business activity was 3.6 percent. And 12.5 percent of tax returns
showing net income of $1 million or more were audited, while only 8.4 percent of these returns had
been audited in the preceding year.
IRS staff conducted 25 percent of the audits in 2011 in person, up from 21.7 percent the preceding year.
The remaining 75 percent were correspondence audits, meaning they were handled by mail with no face-to-face
interaction between the taxpayer and IRS staff.
So what conclusions can we draw from this data?
Overall, the risk of being audited is low. Phew! But…
Returns showing business activity, such as a Schedule C writing business, are subject to a higher audit risk than
individual returns that do not include business activity. This increased risk makes sense, however, given that writers
take deductions related to their writing businesses. While employment income reported on a W-2 is
straightforward and easily verifiable by the IRS, business expenses are sometimes “fudged” by taxpayers. To
promote compliance, the IRS examines a greater number of business returns.
The higher your income, the greater your risk of audit. This too, makes sense. Generally, those with high incomes
often have income from multiple sources, such as wages, business income, and investment income
such as rents, dividends, interest, or proceeds from the sale of stocks or bonds or the exercise of stock options.
With multiple sources of income, there is more chance for error. In addition, old tax law did not require
investment companies to report the amount a taxpayer had paid for an investment (the taxpayer’s
“cost basis”). Some unscrupulous taxpayers misstated their cost basis on their returns, thus fraudulently reducing
the reported gain. New legislation requires investment companies to report the taxpayer’s cost basis
in investments, which should reduce misreporting of gains.
What can you do to decrease your audit risk?
Following the rules will reduce your chance of being audited. Be sure to pay your taxes on time via withholding
or timely estimated tax payments. File your tax returns on time as well. If you can’t get your return completed
by April 15, be sure to request an extension and get your returned filed as soon as possible. October
15 is the absolute deadline for extended returns. Do not miss this filing date! In my experience, the IRS focuses
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