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The effects of declining IRS audit rates

| Apr 20, 2018 | audits

Many taxpayers in Maryland are perpetually concerned about the potential of an IRS audit, even when they’ve taken care to file everything correctly. Statistics show that the overall audit rate of the tax agency is continuing to decline and that this decrease is especially notable for high-income individuals and businesses. Less than 1 percent of individual tax returns and those filed by business partnerships are likely to be audited.

Some wonder if people will be more likely to file inaccurate returns or evade taxes if the audit rate continues to decline. In general, when people purposefully file an inaccurate tax return, they either underreport their income or exaggerate their deductions. Most people find it difficult to underreport income because their employers or contracting agencies file necessary paperwork with the federal government. However, up to 63 percent of income may be underreported when all-cash transactions and other unrecorded payments are the methods of payment.

When it comes to individual taxpayers, these “underreporters” tend to be at the very low and very high end of the wage scale — babysitters, servers and others who are paid in cash at one end and people with high-value, unreported partnership or investment income at the other. However, the issue may be greater for small business owners. Small businesses could fail to report cash income and transactions or ascribe personal expenses to the business.

While recent changes to U.S. tax laws eliminate many incentives to overstate deduction, business owners and higher-income individual taxpayers may be more prone to errors. The laws create incentives for new business creation that might confuse many first-timers. When a taxpayer is hit with an IRS audit, an attorney could help them to protect their rights and advocate for a positive solution.