Morality aside, if you want to consider the odds of getting caught for a questionable tax deduction or other dubious choice when you file, there are three basic scenarios:
1) You are saying something which is at variance with other information the IRS has. For example, you might have failed to mention interest income when the IRS got a 1099 from your bank. In this scenario, you are almost sure to be caught if the IRS has programmed its computers correctly. We are talking about the government after all, so you're not completely doomed, but you'll probably be caught more than half the time. The most likely case is that you will get a letter from the IRS saying that you made a mistake which specifies the taxes, interest and penalties you owe. As an aside, it's hard to come up with a scenario 1 example where what you're doing seems reasonable.
2) The deduction you are taking is not documented elsewhere in the IRS's records, but stands out by its size or in some other way. Perhaps you have an unusually large home office for your business (a deduction the IRS likes to go after). Here the IRS will have to audit you to do anything, but the size of the deduction will make that audit more likely. For this scenario, May's 5% seems in the ballpark if the size isn't so huge that the IRS agent who sees it stares in incredulity.
3) The deduction you are taking looks entirely appropriate to someone casually viewing your return, but you know that it was a judgment call or is poorly documented. Here, you will only be caught by a random audit. The frequency of these varies from year to year, by income, and according to a hoard of other factors, but something around 0.2% is in the right order of magnitude if you're not in a high-risk group like those [insert liberal invective of your choice] rich people.
In scenarios 2 and 3 if you do get caught, there is also a risk of criminal prosecution for tax fraud if your decision doesn't look reasonable in retrospect. This probably won't happen if you can give a plausible argument for your choice based on information that you had reason to believe was accurate. If the Criminal Investigation Division agent (this is a different person than the revenue agent whose concern is just getting money from you) believes that you knew or should have known that you were violating the law, then ugly things can happen beyond the normal interest and penalties.
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timeasmymeasure
Frequency of getting caught
Date: 2002-08-24 05:35 am (UTC)1) You are saying something which is at variance with other information the IRS has. For example, you might have failed to mention interest income when the IRS got a 1099 from your bank. In this scenario, you are almost sure to be caught if the IRS has programmed its computers correctly. We are talking about the government after all, so you're not completely doomed, but you'll probably be caught more than half the time. The most likely case is that you will get a letter from the IRS saying that you made a mistake which specifies the taxes, interest and penalties you owe. As an aside, it's hard to come up with a scenario 1 example where what you're doing seems reasonable.
2) The deduction you are taking is not documented elsewhere in the IRS's records, but stands out by its size or in some other way. Perhaps you have an unusually large home office for your business (a deduction the IRS likes to go after). Here the IRS will have to audit you to do anything, but the size of the deduction will make that audit more likely. For this scenario, May's 5% seems in the ballpark if the size isn't so huge that the IRS agent who sees it stares in incredulity.
3) The deduction you are taking looks entirely appropriate to someone casually viewing your return, but you know that it was a judgment call or is poorly documented. Here, you will only be caught by a random audit. The frequency of these varies from year to year, by income, and according to a hoard of other factors, but something around 0.2% is in the right order of magnitude if you're not in a high-risk group like those [insert liberal invective of your choice] rich people.
In scenarios 2 and 3 if you do get caught, there is also a risk of criminal prosecution for tax fraud if your decision doesn't look reasonable in retrospect. This probably won't happen if you can give a plausible argument for your choice based on information that you had reason to believe was accurate. If the Criminal Investigation Division agent (this is a different person than the revenue agent whose concern is just getting money from you) believes that you knew or should have known that you were violating the law, then ugly things can happen beyond the normal interest and penalties.
Telnar