IRS Audits: Many Factors Affect Likelihood

The IRS does not operate in a vacuum. The agency is affected by political pressure to cut the federal budget, and for the second straight year has less money to do its work.

IRS audits may be affected by the reduction in the agency’s budget of about 2 percent compared to last year. Partly as a result of this, the overall audit rate for individuals may drop below one percent for the first time in six years.

Of course, the IRS has ways to try to make do with fewer resources. For one thing, it tends to target higher income taxpayers for audits at a higher rate than those with lower income.

And then there is the use of technology. According to IRS Deputy Commissioner Steven Miller, the agency puts tax returns through a computer program in an attempt to spot returns that raise potential issues.

One aspect of this electronic screening involves assigning returns to “tolerance levels.” These levels are based on dollar values or other measurements that the IRS programs into its computers to trigger potential audits.

In practice, what this means is that if a given tax return’s financial reporting falls within the tolerance level, a manual review of the return is less likely.

In a 2008 report, the Treasury Inspector General for Tax Administration showed that the IRS had not used sufficient empirical data to set the tolerance levels – nor had the agency tested their effectiveness.

The IRS says that the protocols for the use of tolerance levels are not checked over annually. But clearly the agency cannot put everything on autopilot.

Source”: “IRS audits may dip this year because of staffing shifts,” Kevin McCoy, USA Today, 4-11-12