Contributing Author James C Young
Tax audits are in the news more than usual, perhaps because Donald Trump said that he can’t release his tax returns to the public while he is being audited by the IRS.
But now that he has been elected President, the odds of his tax return being audited just went up (way up). Why? Because if you are living in the White House, your odds are 100%. The President (and the Vice-President) have their tax returns audited every year, as required by Section 188.8.131.52 of the Internal Revenue Manual.
The Internal Revenue Manual spells out strict rules under which these returns are audited. They require expeditious processing, and unusual security precautions. For example, the returns “should be kept in an orange folder at all times.”
Those audits, it adds, must be completed at the Baltimore Technical Services office of the IRS. They must be kept out of view of other IRS employees and locked “in a secure drawer or cabinet when the examiner is away from the work area.” Given the size of Donald Trump’s tax return, these rules could be a problem . . .
But, assuming you’re not aiming to run the free world, what are your odds of being audited?
Student Activity To answer this question, have your students download and explore the IRS Data Book which provides a great deal of information about tax returns filed, taxes collected, refunds issued, examinations, enforcement actions, and information about the IRS (and its budget).
Section 2 of the Data Book deals with IRS examinations (audits). In addition to providing information about returns selected for audit, it also provides information about the types of audit (correspondence and field) and whether additional taxes were assessed (or refunds provided). Here is a summary of that information for 2015.
And here is their summary of audit coverage over the last few years.
And, back to the original question, here are the “odds” of being audited (by size of AGI).
Overall, only 0.84% of individual returns were audited (that’s about 1 in 119). But, as you would suspect, there are differences based on AGI. Notice the “odds” if the taxpayer reported no AGI (3.78%) vs. under $25,000 of AGI (1.01%). And, notice the lowest odds (AGI between $50,000 and $75,000).
Your students might wonder about the “no AGI” audit rate being so high. You can have them explore this by looking at the underlying data (on page 23 of the 2015 IRS Data Book). For example, you can have them summarize the individual income tax return data by return type) in a spreadsheet and create a graphic that shows returns filed and examination coverage. Doing this should lead them to understand that filing a return that claims an earned income tax credit significantly increases the odds of being audited. In fact, of the 1.23 million returns audited by the IRS in 2015, about 39% claimed an earned income tax credit (478,032 returns in total). So almost 4 out of every 10 returns audited claimed an earned income tax credit.
Information on additional tax assessed as a result of audits is also provided (see page 24). Of the $12.3 billion of additional tax assessed in 2015, about $2.4 billion related to returns that claimed an earned income tax credit (so about 19% of additional assessments).
All of this, of course, relates to the scrutiny surrounding IRS overpayments on returns claiming the earned income tax credit (see stories here and here, and Treasury Inspector General for Tax Administration reports here, here, and here). And, as part of the PATH Act of 2015, the IRS is prohibited from providing refunds on returns claiming either the earned income tax credit or the additional child tax credit until February 15 (see § 6402(m)).
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