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Tax audit risk dropping fasting for higher earners

The percentage of tax payers who get audited by the IRS is low and seems to be getting lower by the day. But as many good tax attorneys and financial advisors often tell clients, there’s good news and bad news. The lower audit rate is no exception.

Take a moment to feel the pleasure of knowing that your chances of being audited are not high. Then, when you’re ready, prepare for the worst.

Audit rates have rarely been this low

The IRS audit rate is currently 0.59%, according to an article this spring in Forbes. It hasn’t been that low in about 17 years. To know what your personal likelihood of being audited might be, you need to consider your income level. But you don’t have to consider it as carefully as you used to, since the top rate is dropping closer to that of lower income households.

The audit rate has long declined steady with taxpayer income, and it still does. But only two years ago, the rate for people with an adjusted gross income (AGI) of more than of $10 million was 14.52%. At latest report, it was only 6.66%. The current rate, in other words, is less than half of what it was a short time ago.

Your rate may not be dropping as much as you think

With lower AGIs, this sharp rate decline dulls considerably. For example, the rate for an AGI of $1 million to $5 million is about two-thirds what it had been two years ago. A nice decline, but not the “less than half” of above $10 million.

Things get interesting when you consider a household AGI of between $50,000 to $75,0000. Their likelihood of being audited actually increased from 0.48% to 0.54%. Their likelihood two years ago was about 89% of their likelihood today.

One statistic is probably terrible for everyone

While our chances of being audited may be dropping, our chances of being caught unprepared or even red-handed when we are audited could be skyrocketing. Something like a million people are audited every year, and approximately 100% of them probably assume the statistics mean they’re immune from auditing.

It’s important to have your affairs in order, understand your tax liability for everything you do and keep meticulous records. And by all means, keep in close contact with your tax attorney, if only to hear someone remind you now and then that you should make decisions based on the law and not on your reading of statistics in the news.

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