How Often Are Tax Audits Done and What Triggers Them?

Tax audits are examinations of an individual’s or organization’s financial information to ensure that tax returns accurately report income, deductions, and credits, and comply with tax laws. The primary purpose of an audit is to verify the accuracy of reported tax liabilities and promote fairness within the tax system. Audits are a part of tax administration designed to maintain the integrity of tax reporting.

Overall Audit Rates and Trends

The likelihood of an individual tax return being audited by the Internal Revenue Service (IRS) remains relatively low, with overall audit rates for individuals often below 0.5% in recent years. For instance, in fiscal year 2022, the audit rate for individual returns was 0.26%. This overall low rate, however, varies significantly depending on the taxpayer’s income level and the complexity of their return.

Taxpayers with higher incomes generally face a greater chance of audit. For individual taxpayers reporting incomes of $1 million or more, the audit rate in fiscal year 2022 was 1.1%, considerably higher than for lower income brackets. Conversely, those with incomes between $25,000 and $500,000 saw audit rates as low as 0.2%.

Business taxpayers, including corporations and partnerships, also experience varying audit rates based on their size and reported income. Large corporations face higher audit scrutiny, with rates around 6.5% in fiscal year 2022. This contrasts sharply with smaller businesses and partnerships, which generally have much lower audit rates, often below 1%.

Overall trends have shown a decline in audit frequency over the past decade, largely due to reduced IRS funding and staffing. However, recent legislative changes, such as the Inflation Reduction Act of 2022, aim to increase IRS enforcement capabilities, which could lead to a modest rise in audit rates in future years. Even with potential increases, the overall probability of being audited is likely to remain low for most compliant taxpayers.

Factors Influencing Audit Selection

While the overall chances of an audit are low, specific characteristics of a tax return can significantly increase its likelihood of being selected for examination. The IRS employs sophisticated data analytics and scoring systems to identify returns with the highest probability of errors or non-compliance. These systems assign a score to each return, indicating potential for tax adjustments. The IRS also uses information matching, comparing reported income against third-party reports like Forms W-2 or 1099-NEC.

Unusually high deductions relative to reported income often draw scrutiny. For example, if a taxpayer claims charitable contributions or medical expense deductions that are disproportionately large compared to their adjusted gross income, it can trigger a review. Significant fluctuations in income from one year to the next without a clear explanation might also raise questions.

Self-employment and participation in cash-intensive businesses are also common triggers for audits due to challenges in verifying income accuracy. Unreported income, identified through discrepancies between income reported on a tax return and information received from employers or financial institutions, is a direct cause for audit selection.

Claiming certain credits or deductions, like the Earned Income Tax Credit (EITC) or specific business expenses, can also elevate audit risk due to their complexity and susceptibility to error. Mathematical errors, inconsistencies, or incomplete information on a tax return can also lead to a review.

Common Audit Types and Their Frequency

The IRS conducts audits using several methods, each varying in scope and intensity. Correspondence audits are the most frequent type, typically handled entirely through mail. These audits often involve requests for documentation to support specific deductions, credits, or income items reported on the tax return.

Correspondence audits are generally less intrusive and focus on one or two specific issues, such as verifying charitable contributions or proving eligibility for a particular tax credit. Taxpayers usually receive a letter detailing the specific information needed.

Office audits represent a more involved level of examination, requiring the taxpayer to appear at a local IRS office. These audits are more comprehensive than correspondence audits and typically address several issues or an entire schedule on a tax return. The IRS usually contacts the taxpayer by mail, outlining the records to bring.

Field audits are the most comprehensive and least frequent type of examination. These audits are conducted at the taxpayer’s home, business location, or their representative’s office. Field audits are reserved for complex individual returns, large businesses, or specialized tax issues that require extensive review of financial records. The scope of a field audit can be broad, examining multiple tax years and various aspects of financial operations. During a field audit, an IRS agent will thoroughly review books, records, and internal controls to verify compliance with tax laws. The initial contact for a field audit is usually a letter, outlining the tax years being examined and a list of requested documents.