How Likely Are You to Get Audited by the IRS?

Every year, taxpayers across the United States face a common fear: the possibility of being audited by the Internal Revenue Service (IRS). While it's true that the IRS conducts audits each year, the likelihood of being audited is relatively low for most taxpayers. Let's take a closer look at the factors that affect your chances of being audited and what you can do to minimize your risk.

What Are the Odds?

In fiscal year 2021, the Internal Revenue Service collected over $4.1 trillion in gross taxes. This amount represents approximately 96% of the federal government's annual funding. The IRS is essential for the functioning of the federal government since it collects the money needed to run the country's programs and services.

However, budget cuts have made it difficult for the IRS to carry out its duties. Between 2010 and 2019, when adjusted for inflation, funding for the agency declined by more than 20%. This decrease in funding has affected the IRS's ability to hire staff and modernize its technology, making it harder for the agency to keep up with its responsibilities.

According to the latest data from the IRS, the overall audit rate for individuals in the United States was just 0.38% in 2022. That means that out of every 1,000 taxpayers, less than four can expect to be audited. However, the likelihood of being audited varies depending on several factors.

Income Level

One of the biggest factors impacting your odds of being audited is your income level. In 2020, taxpayers earning less than $200,000 had an audit rate of just 0.2%, while those earning between $200,000 and $1 million had an audit rate of about 0.8%.

Taxpayers earning over $1 million have experienced a significant decrease in audit rates in recent years. According to IRS data, the audit rate for taxpayers earning over $1 million was 2.4% in 2020, down from 4.4% in 2016. However, despite the decrease in audit rates, the wealthy are still audited more frequently than taxpayers earning below $200,000 on average.

Note that the statistics IRS reports at the end of each year are not the final results for the most recent tax years. It's important to look at more recent data, especially for higher-income taxpayers who are often audited later. For higher-income taxpayers, the IRS may initiate audits up to three years after a tax return is filed. For example, in 2019, audit rates for taxpayers with income over $100,000 doubled just seven months later.

2019 Tax Year Audit Rates Over Time

Type of Income

The type of income you receive can also impact your chances of being audited. For example, taxpayers who report business or rental income are more likely to be audited than those who only report wage income.

Red Flags

Certain red flags on your tax return can also increase your chances of being audited. These might include claiming large charitable donations, taking a home office deduction, or failing to report some of your income. While you shouldn't avoid taking legitimate deductions or reporting your income accurately, it's a good idea to double-check your return for any potential red flags before filing.

Taxpayers who claim the Earned Income Tax Credit (EITC) are more likely to have their taxes reviewed, especially those in lower and middle-income brackets. Non-refundable tax credits are only applied until the taxpayer's tax liability is reduced to zero. After that, any remaining credit is forfeited and cannot be refunded.

But because EITC is a refundable tax credit - even if a taxpayer has no tax liability, they could still receive a refund. As a result, the IRS scrutinizes tax returns that claim the EITC to ensure that only eligible taxpayers receive the credit.

Another major red flag for IRS tax audits is unreported income or discrepancies between reported income and documents that third parties send to the IRS, such as W-2s and 1099s. The IRS receives copies of these documents and compares them with the income reported on your tax return. Any differences or discrepancies may trigger an audit, especially if the unreported income is substantial.

For example, if you forget to report income from a freelance job, rental income, or investment income, the IRS will likely notice the discrepancy and may initiate an audit. The same goes for discrepancies in reported income, such as reporting less income than is shown on W-2 or 1099 forms.

Here are some common red flags that could potentially trigger an IRS tax audit:

• Unreported income or discrepancies between reported income and third-party documents, such as W-2s and 1099s.
• High income, particularly for those in the top income brackets.
• Claiming excessive deductions or expenses relative to income, especially in areas like home office deductions, travel and entertainment expenses, and charitable contributions.
• Owning a small business or being self-employed.
• Claiming losses or deductions for a hobby activity that is not intended to make a profit.
• Large charitable donations relative to income.
• Filing for a home office deduction, particularly if the deduction is for a significant portion of the home.
• Claiming business use of a personal vehicle, particularly if the mileage seems excessive.
• Claiming rental losses for multiple years.

What Can You Do to Minimize Your Risk?

While there is no sure way to eliminate your risk of being audited, there are some steps you can take to minimize your chances:

Be honest and accurate: Make sure you report all of your income and take only legitimate deductions.

Keep good records: Keep detailed records of your income and expenses to support your tax return in case of an audit.

Avoid red flags: Be careful when claiming deductions that might raise red flags, such as large charitable donations or home office deductions.

Seek professional help: Consider working with a tax professional who can help you prepare your return and minimize your risk of being audited.

In conclusion

While being audited by the IRS can be a scary prospect, the likelihood of it happening is relatively low for most taxpayers. However, there is still a chance of being audited, and understanding the factors that impact them can help you minimize your risk. Keep detailed records, report all income, and avoid the red flags mentioned in this article. Even if you do end up being audited, as long as you have followed the IRS rules and kept accurate records, you should be able to navigate the process with ease.