Chances of an IRS Audit
The chances of an IRS audit depend on various factors, with income level being a significant one.
Overall Audit Rate:
Historically, the audit rates have been relatively low. For all returns filed for Tax Years 2013 through 2021, the IRS examined 0.44% of individual returns and 0.74% of corporation returns.
Audit Rates by Income Level (Based on recent data):
Less than $25,000: Around 0.3% to 0.4%
$25,000 - $50,000: Around 0.2% to 0.4%
$50,000 - $75,000: Around 0.1% to 0.2%
$75,000 - $100,000: Around 0.1% to 0.2%
$100,000 - $200,000: Around 0.1% to 0.2%
$200,000 - $500,000: Around 0.1% to 0.2%
$500,000 - $1,000,000: Around 0.3% to 0.6%
$1,000,000 - $5,000,000: Around 0.5% to 1.6%
$5,000,000 - $10,000,000: Around 1.4% to 3.1%
Over $10,000,000: Around 2.9% to 8.7% or even higher in some reports.
Higher Income, Higher Chance: As your income increases significantly (especially above $200,000 and even more so above $1 million), your chances of being audited by the IRS generally increase. This is because the IRS tends to focus on higher-income returns where potential discrepancies could yield more significant revenue. This is due to primarily internal cost benefit analysis.
Low-Income with EITC: Interestingly, taxpayers claiming the Earned Income Tax Credit (EITC), who typically have low incomes, also face a higher-than-average audit rate compared to other taxpayers in similar income brackets. These audits are often conducted through correspondence. Correspondence is normally a mailed letter to your home address, where you must respond to the IRS’s question.
Declining Audit Rates: Overall audit rates have declined in recent years due to factors like decreased IRS staffing. However, the IRS has stated its intention to increase audits on those with higher incomes (above $400,000) using funds from the Inflation Reduction Act. Due to the current layoffs and staffing issues starting in 2025 at the IRS, I believe audit rates will continue to decrease.
Focus on High-Income Non-Compliance: The IRS has been directed to focus its increased enforcement efforts on high-income earners and corporations to address non-compliance in these areas.
Factors that Can Increase Your Audit Risk (Red Flags):
Missing Income: The IRS compares information from W-2s, 1099s, and other income statements with what you report. Discrepancies are a major trigger.
Excessive Deductions: Claiming deductions that are unusually large compared to your income or others in your income bracket can raise suspicion.
Business Losses: Consistent or substantial business losses can trigger scrutiny, especially for sole proprietorships, as the IRS might question if it's a legitimate business or a hobby.
Unusual Deductions: Deductions that seem out of character for your profession or income level can raise eyebrows.
Intentional Misleading or Sloppy Returns: Filing returns with missing information, math errors, or round number estimations can increase your audit risk.
High Self-Employment Income: Self-employed individuals can face a higher audit risk due to the complexities of reporting income and expenses.
Foreign Accounts or Assets: Not properly reporting foreign financial accounts can lead to audits.
Amending Returns to Lower Tax Liability: While you have the right to amend, doing so to significantly reduce your tax could trigger a review.
Large Cash Transactions: Significant cash payments or deposits can raise questions.
Inconsistent Income: Large swings in income from year to year might prompt the IRS to investigate for underreporting.
Home Office Deduction: Ensure you meet the strict "regularly and exclusively" use requirements.
Business Meals, Travel, and Entertainment: These are often scrutinized, so meticulous record-keeping is crucial.
How to Minimize Your Audit Risk:
Report All Income: Ensure all income from all sources is accurately reported.
Keep Accurate Records: Maintain thorough documentation for all deductions and credits claimed.
Claim Legitimate Deductions: Only claim deductions you are entitled to and can support with documentation.
File Electronically: E-filing generally reduces errors compared to paper filing.
Ensure Accuracy: Double-check your math and all information on your return.
Seek Professional Help: If your tax situation is complex, consider using a qualified tax preparer.
In conclusion, while the overall chance of an IRS audit is relatively low for most individuals, certain factors, particularly higher income levels and red flags on your return, can increase that risk. Staying organized, reporting accurately, and claiming only legitimate deductions are the best ways to minimize your chances of being audited.
