How Often Do People Get Audited by the IRS?

Tax audits by the Internal Revenue Service (IRS) serve a fundamental purpose. They review a taxpayer’s financial information and tax returns to ensure accuracy of reported income, deductions, and credits. These examinations verify compliance with tax laws and maintain fairness across the taxpayer base. An audit does not inherently suggest wrongdoing, as many conclude with no changes or even a refund. Audits are a routine part of tax administration, designed to uphold the integrity of the tax system.

Understanding Overall Audit Rates

The frequency of IRS audits for individuals and businesses has fluctuated. In recent years, the overall audit rate for individual income tax returns has been low, often less than 1%. For instance, as of fiscal year 2023, only 0.2% of individual income tax returns filed for 2021 were audited. This decline from prior years is largely attributed to reduced IRS staffing and budget constraints.

Audit rates vary considerably based on income and entity type. Taxpayers with higher incomes generally face a greater likelihood of audit. For 2021 returns audited in fiscal year 2023, individuals earning $1 million to $5 million had an audit rate of 0.5%, while those with $10 million or more in income saw a rate of 2.9%. Large corporations and partnerships also experience higher audit rates compared to smaller entities.

Recent legislative changes, such as the Inflation Reduction Act of 2022, provided the IRS with increased funding. This funding focuses on enhancing enforcement for high-income taxpayers, large corporations, and complex partnerships. The IRS aims to significantly increase audit rates for these groups, while maintaining that audit rates for individuals and small businesses earning under $400,000 will not increase above historical levels.

Key Factors That Influence Audit Likelihood

Certain characteristics within a tax return can increase the probability of an IRS audit. A common factor is discrepancies between income reported by the taxpayer and information received by the IRS from third parties. The IRS receives copies of forms like W-2s for wages and 1099s for freelance income, interest, dividends, or other payments. If the income stated on a tax return does not match these third-party reports, the return can be flagged for review. This information matching system is a primary method for identifying potential underreporting.

Claiming specific types of deductions or credits can also draw attention, particularly if they appear unusually large in proportion to income or deviate from norms for similar taxpayers. Examples include unusually high charitable contributions, home office deductions, or substantial business losses, especially for businesses that consistently report losses. The Earned Income Tax Credit (EITC) historically has a higher audit rate due to IRS efforts to prevent ineligible claims.

Engaging in complex transactions involving foreign accounts or assets, or significant cryptocurrency transactions, may also elevate audit risk. Amended returns, large cash payments or deposits, and significant, unexplained changes in income from one year to the next can also trigger closer examination.

How the IRS Selects Returns

The IRS employs a multi-faceted approach to select tax returns for examination. A primary method involves computer scoring systems, notably the Discriminant Function System (DIF) score. The DIF score assigns a numerical rating to each return, indicating the likelihood of errors or discrepancies that could result in additional tax liability. This score is generated by comparing a taxpayer’s return against statistical models based on historical data from previously audited returns, considering factors like income, deductions, and industry averages. Returns with higher DIF scores are flagged for further review by IRS personnel, who then decide whether an audit is warranted.

Another computer-driven system, the Unreported Income DIF (UIDIF) score, specifically targets returns with a high potential for unreported income. This system assesses the relationship between reported income and expenses, identifying returns where expenses appear disproportionately high compared to income, which could suggest undisclosed earnings. The IRS also relies on information matching, cross-referencing taxpayer data with third-party reports.

Related examinations can occur if a taxpayer’s return is linked to another audited entity, such as a business partner or investor. The IRS also conducts specific compliance initiatives or projects that target particular industries, types of transactions, or tax law provisions, leading to audits within those focused areas.

Common Audit Misconceptions

Many common beliefs about IRS audits are often inaccurate. One misconception is that an audit automatically implies wrongdoing or criminal intent. In reality, audits are routine processes aimed at verifying compliance, and many result in no changes to the tax liability. Another misunderstanding is that claiming specific deductions, such as the home office deduction or large charitable contributions, guarantees an audit. While these items can attract scrutiny, it is the unusual or disproportionate nature of the deduction relative to a taxpayer’s income or profession that draws attention, not the deduction itself. Legitimate deductions, when properly documented, are permissible and should not be avoided out of fear of an audit.

The idea that audits are always in-person confrontations with IRS agents is also a myth. The majority of IRS audits are conducted through mail correspondence, where the IRS requests additional documentation or clarification for specific items. Only a smaller percentage involve office or field examinations. The notion that only wealthy individuals are audited is incorrect; while higher earners face increased rates, the IRS audits taxpayers across all income levels, including those claiming certain credits like the EITC. Beliefs that e-filing or amending a return increases audit likelihood are unfounded, as the IRS screens all returns, and electronic filing can even reduce mathematical errors.