How Likely Is It to Be Audited by the IRS?

The Internal Revenue Service (IRS) conducts audits to verify the accuracy of information reported on tax returns, including income, deductions, and credits. These examinations ensure compliance with federal tax laws. Undergoing an audit is a standard part of the tax administration process and does not inherently suggest any wrongdoing. The IRS uses various methods to select returns for review, aiming to allocate its resources effectively.

Current Audit Trends and Statistics

IRS audit rates have declined in recent years, though specific income levels and types of returns still face varying scrutiny. For fiscal year 2022, the audit rate for individual returns was approximately 0.25%, meaning about 1 in 400 individual tax returns were audited. This rate was lower than in previous decades, reflecting reduced IRS staffing and resources. Audit rates increase considerably with higher reported income.

For individuals reporting over $10 million in income, the audit rate in 2022 was about 3.3%. Those with non-business income between $1 million and $5 million faced an audit rate of approximately 0.6%. Larger corporations also experience higher audit rates compared to small businesses. The IRS focuses on high-income taxpayers and complex business structures to address the tax gap, which is the difference between taxes owed and taxes paid on time.

Key Factors Influencing Audit Selection

Several elements can increase the likelihood of a tax return being selected for an audit. Higher income levels correlate with increased audit scrutiny due to more complex financial arrangements. Individuals reporting over $1 million in income consistently face higher audit rates than those in lower income brackets. The complexity of these returns often presents more opportunities for discrepancies or misinterpretations of tax law.

Returns that include self-employment income, typically reported on Schedule C (Form 1040), also receive more attention. This is because business income and expenses can be intricate, and the IRS seeks to ensure all income is reported and deductions are legitimate. Large or unusual deductions and credits can also trigger review. For example, claiming a home office deduction without meeting strict requirements, reporting substantial rental losses, or claiming the Earned Income Tax Credit (EITC) or fuel tax credit without proper documentation can increase audit risk. The EITC is prone to errors, leading to higher audit rates for claimants.

Information matching discrepancies are a significant red flag for the IRS. The agency receives copies of forms like W-2s from employers and various 1099 forms (e.g., 1099-INT, 1099-DIV, 1099-NEC) from third parties. If the income or deductions reported on a taxpayer’s return do not match this third-party information, the IRS’s automated systems may flag the return. Significant fluctuations in income or deductions from one year to the next, especially if they deviate substantially from prior filing patterns or industry averages, can also prompt an audit. A history of previous audits, particularly those that resulted in significant changes to tax liability or additional taxes owed, may also increase the chances of future scrutiny.

Navigating an IRS Audit

An IRS audit begins with an official notice or letter sent by mail. This notice specifies the tax year and items under review. Common notices include CP2000 for income discrepancies, or forms like 566, 3572, or 3219A for more comprehensive audits. Respond promptly and in an organized manner upon receiving a notice.

Audits fall into three types: correspondence audits, conducted by mail; office audits, requiring a visit to an IRS office; and field audits, where an IRS agent examines records at the taxpayer’s home or business. The type of audit depends on the complexity of the issues. During an audit, the IRS requests specific documentation to substantiate reported income, deductions, or credits. This may include receipts, invoices, bank statements, canceled checks, mileage logs, or other financial records.

Work with the auditor by providing requested information and clarifying any discrepancies. Maintain a cooperative but factual approach. Outcomes include a “no change” result (IRS agrees with original return), additional tax owed due to disallowed deductions or unreported income, or a refund if an overpayment is found. Taxpayers can appeal IRS findings if they disagree with proposed changes, typically through the IRS Independent Office of Appeals.

Promoting Accuracy in Tax Filings

Proactive measures ensure accuracy and completeness in tax filings. Maintain thorough and organized records for all income, expenses, deductions, and credits. This includes keeping digital copies on secure cloud storage or physical files of receipts, invoices, and bank statements for at least three years from the date the tax return was filed or due, whichever is later. Some records, such as those related to property basis, should be kept indefinitely.

Before submitting a tax return, double-check all received tax forms, such as W-2s from employers and various 1099 forms from financial institutions or clients, for accuracy. Verify that all income sources are reported on the return to prevent discrepancies with information the IRS receives from third parties. Understanding basic tax laws applicable to one’s financial situation can further enhance accuracy. This involves researching specific deductions or credits before claiming them and ensuring eligibility requirements are met.

Utilizing reputable tax preparation software can help minimize common errors and ensure compliance with current tax regulations. For more complex tax situations, engaging qualified tax professionals, such as Certified Public Accountants (CPAs) or Enrolled Agents (EAs), can provide expertise. These professionals are knowledgeable about tax laws and can help ensure accurate reporting, reducing the potential for errors that might lead to an audit.