Audit rates have been decreasing for the past five to seven years because the auditors are overwhelmed and understaffed. So, they're going to make the best use of their time and go after people who will give them the best revenue.
The IRS reports in its 2017 Data Book that only one in about 160 individual tax returns last year. High-income households declined the most. Lower income groups also were less likely to be audited.
“The types of returns that are going to be audited even more frequently in that .07 percent-Schedule C filers, for the small business owner that is not going to incorporate, throws everything on their 1040. The 1040 tax return is the most frequently audited in those rates,” said Kholer.
He said once you incorporate your business and take it to the next level, you reduce your chance of being audited by 1,500 percent.
He added you can reduce your chances of being audited by filing your taxes on time, but extensions are ok.
“The IRS is like a boyfriend or girlfriend. If you don’t stay in touch with them, they’re going to assume the worst. They’re going to assume you’re cheating on them. And, they start to say bad things to all their friends—and you don’t want that. You want to stay in good graces, so at least file. We’ll worry about paying them later,” said Kohler.
If you make an extension, you further reduce your chances of an audit...but never wait until after October 15th.
If you get a notice, respond—don't ignore the IRS.