The Audit Lottery

It never ceases to amaze me how many people will spend money on lottery tickets when the odds are so blatantly bad for the buyers of the tickets. You can get far better odds at almost any game in any casino. But there is another "lottery" where almost 99% of the participants are "winners". It's sometimes called the "Audit Lottery". Every year, all of the taxpayer's numbers are entered into a national lottery. If your number is picked, you lose. If your number isn't picked, you're a winner - for another year at least. Since only about 1% of the tax returns filed are audited in any one year, 99% of the taxpayers are "winners" in this reverse lottery. 

This doesn't mean you should indulge in illegal methods of tax avoidance (AKA tax evasion). But it does mean that the actual risk of using an aggressive (but legal) method of saving taxes is not very great. Bear in mind that if you file a fraudulent return, there is no statute of limitations on being audited. But if your tax planning is legal, after three years, your tax return is closed and can't be audited by the IRS. As a practical matter, if you aren't notified of an audit within 18 months after your return is filed, it's extremely unlikely that you will be audited for that tax year. 

The timid taxpayer assumes his or her return will be audited and won't claim any tax deductions if there is any doubt as to the proper treatment. The more aggressive taxpayer follows the dictum, "when in doubt, deduct it." The IRS doesn't like this attitude, but  unless there is a clear prohibition against  taking a particular deduction,  the risk is limited to having to pay the tax plus some interest.  So long as there is some substantial legal support,  penalties are unlikely.