For years, IRS audit rates have been declining as Congress has cut the IRS budget and its workforce has shrunk. The agency has relapsed its audit statistics for 2017, which marked the sixth consecutive year that audit rates have gone down. The number of people audited by the IRS in 2016 dropped to just over 1 million. The last time so few people were audited was 2004. Since then, the U.S. has added about 30 million people.
The statistics show that last year the IRS audit rates for individual taxpayers was 0.6 percent. That means that only one out of every 167 individual returns filed were audited. And the majority of these audits were correspondence audits in which the IRS sends the taxpayer a postal letter asking about one or two issues.
However, certain types of taxpayers get audited more than average. Among these are the self-employed, who have long been an IRS audit target. The IRS audited 2.1 percent of Schedule C filers earning $100,000 to $200,000, and 1.3 percent of those earning $25,000 to $100,000.
Even self-employed people who earned less than $25,000 were audited more than average – 0.9 percent. These relatively high audit rates for the self-employed reflect the IRS's belief – backed up by much evidence – that such taxpayers habitually underreport their income, pad their deductions, or take deductions to which they are not entitled to at all.
As you would expect, high-income individuals also get audited more than average. Individuals with incomes between $200,000 and $1 million who didn't file Schedule C had a 0.8 percent audit rate in 2017. Taxpayers with incomes of $1 million or more were had a 4.4 audit rate, down from 5.83 percent in 2016. Are low IRS audit rates good or bad news for taxpayers? For law-abiding taxpayers, they are bad news. The IRS estimates that the "tax gap" – the difference between taxes owed and taxes paid on time – is a whopping $458 billion. We all have to pay higher taxes because so much goes uncollected.