How Many Tax Returns Does the IRS Audit Each Year?
Learn the actual frequency of IRS tax return audits and the key considerations guiding their selection process.
The Internal Revenue Service (IRS) conducts audits to ensure taxpayers accurately report income and comply with tax laws. This article explores current IRS audit statistics, factors that lead to a tax return being selected for review, and how audit trends have evolved.
Current Audit Statistics
The likelihood of an individual income tax return being audited by the IRS remains low. For example, only 0.2% of individual income tax returns filed for 2021 were audited during Fiscal Year 2023, a rate consistent with 2020 returns.
Audit rates vary across different income levels. Taxpayers with incomes below $25,000 had an audit rate of 0.4% in 2020, while those earning between $50,000 and $199,999 saw a rate of 0.1%. Individuals with incomes of $1 million to $4.9 million had an audit rate of 0.4% in 2020, and for those with incomes exceeding $10 million, the rate was 2.4%. For corporate returns, C corporations filed for 2021 had an audit rate of 0.3% in Fiscal Year 2023, while partnerships and S corporations had a 0.1% audit rate for the same period.
Factors Influencing Audit Selection
The IRS employs various methods to select tax returns for audit, often relying on computer algorithms designed to identify potential discrepancies. One such system is the Discriminant Function System (DIF) score, which evaluates a return’s potential for error or non-compliance based on historical data from similar returns. Returns flagged with high DIF scores are then manually reviewed by IRS personnel to determine if an audit is warranted.
Certain elements within a tax return can increase the probability of selection for examination:
Unusually high deductions relative to income or compared to taxpayers in similar circumstances.
Significant, unexplained fluctuations in income or expenses from one year to the next.
A mismatch between reported income and information received from third-party sources, such as W-2 forms or 1099 statements.
Engagement in cash-intensive businesses, which historically have higher rates of unreported income.
Large itemized deductions, substantial business losses, or certain tax credits, like the Earned Income Tax Credit (EITC).
Audit Trends Over Time
Audit rates for individual income tax returns have generally decreased across all income levels over the past decade. From 2010 to 2019, the average individual audit rate fell from 0.9% to 0.25%. This decline is often attributed to reduced IRS staffing levels, which resulted from decreased funding over the years.
The decrease in audit activity has been more pronounced for higher-income taxpayers. For instance, the audit rate for individuals with incomes between $1 million and $5 million dropped from 3% for 2013 returns to 0.5% for 2021 returns. Taxpayers claiming the Earned Income Tax Credit (EITC), who typically have lower incomes, have faced higher-than-average audit rates compared to other income groups. The IRS has recently indicated a strategic shift, with plans to increase audit rates for wealthy individuals, large corporations, and complex partnerships, while aiming to not increase audit rates for small businesses and taxpayers earning under $400,000.