The outlaw Willie Sutton stole an estimated $2 million over a 40-year career robbing banks — and scored the ultimate “success” in his business, living long enough to die of natural causes. Sutton always carried a pistol or Tommy gun with him on jobs, declaring “you can’t rob a bank on charm and personality.” But the gun was never loaded, because, as he said, someone might have gotten hurt! And he became legendary, ironically, for something he never actually said. According to the story, Sutton was asked why he robbed banks — and replied “because that’s where the money is.” But in his 1976 autobiography, Where the Money Was: The Memoirs of a Bank Robber, he confessed that credit for the line belongs to “some enterprising reporter who apparently felt a need to fill out his copy.”

What does a depression-era bank robber have to do with taxes? Well, the IRS estimates that outlaw taxpayers cost the Treasury $385 billion per year in uncollected taxes — roughly 15% of the amount they believe is due under current law. So they work hard to close that gap. In FY 2011, the IRS employed over 22,000 revenue officers, revenue agents, and special agents. They conducted 391,621 “field” audits and 1,173,069 less-intensive “correspondence” audits. They filed levies on 3.7 million taxpayers and filed over a million liens. But they can’t turn over every rock. So how do they case their targets?
Earlier this month, the IRS released their FY 2011 Enforcement and Service Results revealing how likely you are to be audited. And even Willie Sutton would have appreciated the IRS’s “M.O.”:

• If you make less than $200,000, your overall audit risk is only about one in a hundred. (Of course, that average encompasses a range of possibilities. If you run a sole proprietorship in a cash-heavy business like takeout pizza, your risk may be far higher.)
• If you make over $200,000, your overall audit risk rises to about one in twenty-five. Obviously, the IRS sees more opportunity in chasing higher income earners.
• If you pull down over $1 million, your audit risk rises again to one in eight. Welcome to the 1%!

The IRS likes targeting entertainers, athletes, and other celebrities, too. Sure, it sets a high-profile example for the rest of us. But it’s also (spoiler alert) where the money is. Take Hollywood trainwreck Lindsay Lohan, for example. Google her name, and you’ll usually find it followed by “failed another breathalyzer test” or “missed her court-appointed community service.” But last week, Lohan made a different kind of headline. That’s right, the IRS filed a lien against her home seeking $93,701.57 in unpaid taxes from 2009.

Where does that all leave us as we move into this year’s tax season? Our job is to help you pay the minimum tax allowed by law. But we know the IRS is out to challenge us. So we don’t cut corners. We give you good, solid planning. That way, even if you do lose the “audit lottery,” you’ll feel safe knowing your savings are court-tested and IRS-approved.

What are your chances of being audited? The IRS has just released their 2007 data book which provides statistical data on its 2007 fiscal year activities. Overall, audit rates were consistent with what we have seen in recent years with only slight fluctuations. The most audited return continued to be returns claiming the earned income tax credit – accounting for 36.5% of all individual income tax return audits. For entities, S-Corp returns and Partnerships continue to be the least audited with a audit rate of 0.5% and 0.4%, respectively.

The IRS audited approximately 1.4 million individual income tax returns that were filed the prior year. This is a little over 1% of the 134.5 million returns that were filed during that time frame. The bulk of the audits (78%) were correspondence audits in which taxpayers were required to verify of provide evidence of questionable items on their return via mail or other correspondence. Revenue agents, tax compliance officers and tax examiners conducted hands-on audits 22% of the time.

The no-change rate is the number of returns that did not require a change after further clarification. A mere 12% of returns that were examined by revenue agents, tax compliance officers, or tax examiners were cleared with no changes. The rate for correspondence audits was only slightly higher at 16%.

Which returns were selected the most?
503,267 or 36.5% of the audited returns claimed the earned income tax credit

The following are the audit rates for individual returns that included a nonfarm sole proprietor income (“Schedule C”) and that did not claim the earned income tax credit, broken down by total gross receipts:

Under $25,000, 1.3%
From $25,000 to $100,000, 2%
From $100,000 to $200,000, 6.2%
From $200,000 or more, 1.9%.

Returns that included total positive income (TPI) of between $200K and $1 million, the audit rate was 2% for nonbusiness returns and 2.9% for business returns. For returns with TPI of $1 million or more, the audit rate was 9.3%.

The audit rates for Entities is as follows:
Estate/Trust Income Tax Returns, 0.1%
Corporations (C-Corp) with less than $10 million in assets, 0.9%
Corporations (C-Corp) with $10 million or more in assets, 16.8%
S-Corporations, 0.5%
Partnerships, 0.4%
Estate tax returns, 7.7%
Gift tax returns, 0.6%