If You Get Audited Once, Will You Get Audited Again?

Receiving an audit notice from the Internal Revenue Service (IRS) can be a source of apprehension for taxpayers. Many individuals who have experienced an audit wonder if their past encounter increases the likelihood of future examinations. The process can be time-consuming and may lead to additional tax obligations.

Understanding Re-Audit Likelihood

A previous audit does not automatically guarantee a future audit. The IRS employs a data-driven approach to select tax returns for examination, focusing on identifying potential discrepancies or non-compliance, not simply targeting previously audited individuals. If a prior audit concluded with no significant issues or changes to your tax liability, it might reduce the likelihood of a re-audit for the same tax year or specific issues.

The IRS uses computer programs, like the Discriminant Information Function (DIF) system, to score returns based on their likelihood of containing errors. Scores are influenced by how closely a return’s deductions, credits, and income align with norms for similar taxpayers. While random selection is possible, it accounts for a small percentage of audits.

However, if a previous audit uncovered substantial errors, non-compliance, or if a taxpayer consistently faces higher scrutiny, the chances of a future audit could increase. For example, individuals with very high incomes, those earning over $1 million, face higher audit rates compared to other income groups. Similarly, taxpayers engaged in certain business types or those with complex returns may experience more frequent examinations. The IRS aims to ensure tax compliance, and patterns of non-compliance can draw sustained attention.

Common Reasons for IRS Audits

Several factors can increase the probability of an IRS audit, regardless of a taxpayer’s audit history. Frequent triggers involve discrepancies between income reported on a tax return and income reported by third parties to the IRS. The IRS receives W-2s, 1099s, and K-1s, and its systems compare this information with what is filed. Any mismatch, such as unreported income from a side job or investment, can flag a return for further review.

Claiming unusually large deductions and credits can also attract attention. For instance, charitable contributions that appear high relative to income, or substantial business losses claimed on Schedule C, particularly if they consistently offset other income, are common red flags. Similarly, claiming 100% business use of a vehicle or a large home office deduction can trigger scrutiny, as these deviate from typical usage.

Businesses that deal in cash transactions, such as restaurants, laundromats, or salons, are often subject to higher scrutiny due to difficulty tracing cash income. The IRS focuses on cash-intensive operations to address potential underreporting. Simple mathematical errors, transcription mistakes, or incorrect taxpayer identification numbers on a return can also lead to an audit, as these are easily detected by automated systems. Additionally, certain refundable tax credits, like the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC), sometimes trigger audits due to complexity and historical improper claims.

Strategies to Reduce Audit Risk

Proactive measures can minimize a taxpayer’s audit risk. Maintaining thorough and organized records for all income, deductions, and credits is crucial. This includes keeping receipts, invoices, bank statements, and canceled checks for at least three years from the filing date, or longer in some cases. Good recordkeeping serves as the defense in substantiating claims during an audit.

Report all income sources, no matter how small, to prevent discrepancies with third-party reports the IRS receives. Taxpayers should review returns for errors or omissions before filing, checking for correct names, Social Security Numbers, filing status, and income amounts. This careful review can help catch simple mistakes that might otherwise flag a return.

Familiarize yourself with rules for any claimed deductions or credits. Understanding requirements, such as the “exclusive use” rule for home office deductions or documentation for charitable contributions, helps ensure compliance. For complex returns or if uncertainty exists regarding tax laws, considering professional assistance from a qualified tax preparer, such as a Certified Public Accountant (CPA) or Enrolled Agent (EA), can provide accuracy and reduce audit risk. Finally, taxpayers should take IRS correspondence seriously and respond promptly to notices. Ignoring an IRS notice can escalate issues and lead to further penalties.