At first the above seems like a fairly ill-defined question to ask. It’s a bit like asking “should I be concerned that one day a tree is going to fall on my house”. The answer depends heavily on how many trees you have near your house. The same is true for being audited. Your risk of being audited can vary depending on your individual situation. Oddly enough the IRS publishes statistical data on their audits, so you can at the very least put a percentage on how concerned you should be.
As you would expect, the more money you make the more your risk of being audited goes up. In 2012 the IRS audited 3.4% of personal returns that had below $200,000 of income reported and included a business return (schedule C). They audited 3.7% of personal returns with business activity that had income between $200,000 and $1,000,000. If you made over a million dollars, then you would have had a 12.1% chance of your personal return being audited in 2012. If your business is set up as a C-corporation, then you would have had between 0.9% and 2.1% chance of having the business tax return audited. During the same period, the IRS only audited 0.5% of S-corporation and partnership tax returns.
So what does this all mean for you? If you boil it all down, the owner of an average dental practice having a normal year would have had roughly between a 1.96% and 3.7% chance of being audited. If your practice files a partnership or S-corporation tax return, you would be on the lower end of this range. If you report your business income on your personal tax return (Schedule C) you would be on the higher end. Unfortunately these odds aren’t as low as being struck by lightning (1 in a million), which is why it is important to be ready each year for the possibility of an audit. If you ever have questions about how to be better prepared please contact our office.