Audits have declined in recent years, owing to a loss of 30 percent of the IRS’ enforcement staff since 2010. In fiscal year 2016, the agency says it audited nearly 1.2 million tax returns, or just 0.6 percent of the total.
Seven out of 10 audits were conducted after a notice like this:
DEAR TAXPAYER,
SOME OF THE INFORMATION THAT YOU PROVIDED TO US DOES NOT AGREE WITH THE INFORMATION WE RECEIVED FROM OTHER SOURCES.
— THE INTERNAL REVENUE SERVICE
Focus on richer taxpayers
In recent years, the tax collector has been focusing on the wealthy. If you earn $10 million or more, you have a roughly 1 in 5 chance of getting audited. But for most taxpayers, the odds are less than 1 in 100.
Here’s the breakdown:
| Size of adjusted gross income | Returns audited |
|---|---|
| No adjusted gross income | 3.25% |
| Under $25,000 | 0.8% |
| $25,000 – $49,999 | 0.49% |
| $50,000 – $74,999 | 0.41% |
| $75,000 – $99,999 | 0.52% |
| $100,000 – $199,999 | 0.62% |
| $200,000 – $499,999 | 1.01% |
| $500,000 – $999,999 | 2.06% |
| $1,000,000 – $4,999,999 | 4.6% |
| $5,000,000 – $9,999,999 | 10.46% |
| $10,000,000 or more | 18.79% |
Source: Internal Revenue Service Data Book, 2016
What’s the DIF?
In addition to a filer’s overall income, other figures can attract auditors’ attention.
A return can be selected for audit via the IRS’ computer-scoring system known as Discriminant Information Function, or DIF. The DIF looks at deductions, credits and exemptions, with norms for taxpayers in each of the income brackets.
The actual scoring formula to determine which tax returns are most likely to be in error is a closely guarded secret. But it’s no mystery the system is designed to screen for returns that could put more money in the U.S. Treasury.
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