How Likely Am I to Get Audited by the IRS?

An IRS audit involves a review of a taxpayer’s financial information and tax returns to confirm that reported income, expenses, and credits are accurate and comply with tax laws. Being selected for an audit does not necessarily indicate wrongdoing; it is a normal part of how the Internal Revenue Service verifies tax information.

How the IRS Selects Returns for Examination

The IRS employs various methods to identify tax returns for potential examination, combining advanced technology with human review.

One primary tool is the Discriminant Function System (DIF) score. This computer program analyzes tax returns for unusual patterns or deviations from statistical norms, assigning a score that indicates the likelihood of a material change to the tax liability if audited. A higher DIF score suggests a greater potential for errors or non-compliance, prompting further scrutiny.

Another significant method is information matching. The IRS receives copies of various income documents, such as W-2s and 1099s, which it then compares against the income reported on a taxpayer’s return. Discrepancies between these third-party reports and the tax return can trigger automated notices or lead to an audit.

The IRS also considers information from third-party tips, which can originate from whistleblowers, former spouses, or disgruntled employees. Additionally, some returns are selected randomly as part of research programs, like the National Research Program (NRP), designed to understand overall compliance patterns.

Factors That May Increase Audit Likelihood

Certain characteristics and reported items on a tax return can increase the probability of an IRS audit.

Taxpayers with higher incomes generally face a greater chance of review, as their returns often involve more complex financial portfolios, multiple income streams, and extensive deductions. Audit rates tend to rise sharply for individuals with adjusted gross income exceeding $400,000, and even more so for those above $1 million.

Self-employed individuals and those filing Schedule C (Profit or Loss from Business) are often subject to increased scrutiny due to the potential for underreporting income or overstating business expenses. This includes claiming large business losses, home office deductions, or extensive vehicle use.

Large or unusual deductions that appear disproportionate to income or industry norms can also attract attention, such as very high charitable contributions or significant itemized deductions. Rental real estate losses can also be a factor, especially if claimed by individuals who are not real estate professionals. Claiming the Earned Income Tax Credit (EITC) often results in a higher audit rate due to errors.

Unreported foreign bank accounts or offshore income are under increased scrutiny, and discrepancies can lead to audits and penalties. Filing an amended return (Form 1040-X) can sometimes prompt a review, particularly if it involves significant changes to reported income or large deductions. Using only round numbers for income or expenses can signal to the IRS that figures were estimated rather than precisely calculated, potentially raising a red flag.

Types of Audits and the Examination Process

If a tax return is selected for examination, the IRS conducts the audit through different formats, each with varying levels of intensity.

The most common type is a correspondence audit, handled entirely through mail. These audits typically address minor issues or discrepancies, such as missing information or mathematical errors, requiring the taxpayer to provide supporting documentation.

An office audit is a more in-depth examination conducted at an IRS office. Taxpayers are usually asked to attend an in-person meeting and bring specific documents to support certain claims on their return.

The most comprehensive type is a field audit, where an IRS agent conducts the review at the taxpayer’s home, business, or accountant’s office. This type is generally reserved for complex returns, business audits, or cases involving substantial amounts.

The general audit process begins with a notification letter sent by mail, never by phone or email, detailing the tax years under examination and the specific issues or documents requested. The taxpayer typically has about 30 days to respond and provide the requested documentation.

After reviewing the information, the auditor presents their findings, which can result in no change to the tax liability, an agreed-upon adjustment, or a disagreement. If there is a disagreement, the taxpayer has the right to appeal the findings within the IRS or pursue other resolution options.

Interpreting Audit Statistics

Overall, the likelihood of an individual taxpayer being audited by the IRS remains relatively low. For instance, only about 0.2% of all individual income tax returns filed for the 2020 tax year faced an audit, translating to roughly 1 in 500 returns.

However, audit rates vary significantly based on income level. Higher-income earners generally face higher audit rates; for example, taxpayers with annual incomes exceeding $10 million had an audit rate of about 2.4% in 2020.

Conversely, audit rates for taxpayers with incomes between $25,000 and $500,000 were considerably lower, around 0.2% for 2019 tax returns. Audit rates can fluctuate year to year, influenced by factors such as IRS budget allocations, staffing levels, and evolving enforcement priorities. While overall audit rates might appear low, certain factors discussed previously can substantially increase an individual’s risk of being selected for an examination.