Currently it will tell you there is "a magical belt" if any belt is in the inventory of the NPC.
It does not appear to detect it if the belt is worn although I do not know if NPCs automatically wear rainbow belts.
The chance of being detected is mod sense magic divided by 200.
So if your mod sense magic >= 200 you will always see it.
If your mos sense magic = 100 then you have a 100/200 = 50% chance.
Note that rainbow belts are rarely dropped, approximately 1 in 10,000 NPCs have one.
I suspect your issue is more around the rarity of the drops than the chance of detection if dropped.