Why you won’t be audited this year by the IRS

Jonnelle Marte for MarketWatch writes: They’re the 1% no one aspires to join: the small percentage of taxpayers who get audited by the IRS. But those worried about suffering the tax equivalent of a root canal may be in luck this year, experts say. Thanks to budget cuts, the chances of getting audited will be even slimmer than normal.

IRS audit rates for individuals fell last year by 5.3%, according to an analysis by the Transactional Records Access Clearinghouse released this week. The trend may continue this year, experts say, because of the federal spending cuts known as sequestration that are expected to leave the agency with fewer  employees on hand this summer to conduct audits and track down tax cheats, among other actions.  “If you have fewer bodies, you have fewer audits,” says Kevin Brown, leader of PricewaterhouseCoopers’s tax controversy and dispute resolution practice.

IRS employees are also warning that the cutbacks could hurt enforcement actions, according to a survey of government workers by the National Treasury Employees Union, which represents federal workers at the agency. Workers potentially face five to seven unpaid furlough days this summer, when the agency tends to conduct most of its audits, says Brown, a former acting IRS commissioner. The cuts would also come at a time when a hiring freeze prevents the agency from filling jobs. And that is on top of the cuts the agency has already experienced. The IRS started this year with 7,000 fewer full-time employees than it had at the end of 2010, with staffing for key enforcement positions down 6% in the past year, the agency said in a statement.

Of course, the improved odds don’t mean tax cheats should run wild, pros say. The agency has adapted to its slimmer workforce by moving away from face to face audits and using more correspondence audits, which are conducted over the mail, the TRAC report noted, leading the number of correspondence audits to nearly triple over the past two decades. Most cases of underreported income are now spotted through software the IRS uses to match the income reported on tax returns with the information it receives on 1099s and other income documents.
Another reason why tax cheats shouldn’t celebrate just yet: The prolonged enforcement action could mean that those people who do get hit with an audit and are found to owe money may face higher penalty and interest charges than they would have after a speedier audit, IRS employees said in the survey. If people’s tax-filing errors go undetected because of fewer audits, they could end up making the same mistake in multiple years, potentially causing penalties and interest charges to pile up, says Brown.

Update: The IRS points out that the number of audits on large corporate tax returns remains high by historical standards, with more than 17% of large corporations being audited in 2012.