What Are the Chances of Getting Audited by the IRS?

An Internal Revenue Service (IRS) audit is a review of an organization’s or individual’s financial information to ensure it is reported correctly according to tax laws and to verify the reported tax is accurate. While very few taxpayers are selected for an examination, understanding the factors that can lead to one can help demystify the process. Selection for an audit does not automatically imply wrongdoing, but it does require a taxpayer to substantiate the items reported on their return.

Overall IRS Audit Rates

Statistically, the chance of being audited by the IRS is low. According to the 2023 IRS Data Book, only 0.2% of all individual income tax returns were audited for the 2021 tax year, the most recent with complete data. This rate represents a decrease from previous years; for instance, the audit rate for 2013 returns was 0.6%.

In fiscal year 2023, the IRS closed 582,944 tax return audits, resulting in a recommended $31.9 billion in additional tax. Most of these examinations are not intensive, in-person reviews. The majority are correspondence audits conducted entirely by mail that focus on a few specific items on a return. Field audits, where an IRS agent visits a taxpayer’s home or office, are much less common.

How the IRS Selects Returns for an Audit

The IRS uses automated systems to select tax returns for examination. The primary method is a computer program known as the Discriminant Information Function (DIF) system. This program analyzes every tax return and assigns it a numeric score based on its potential for containing errors. A higher score indicates a greater likelihood of incorrect information, flagging the return for potential review.

Another selection method is information matching. IRS computers cross-reference the income reported on your tax return with third-party information returns, such as Form W-2s and Form 1099s. If you report $40,000 in income but the IRS has forms on file showing you were paid $60,000, this discrepancy will generate an automatic notice and could trigger an audit.

Beyond these automated systems, returns can be selected for other reasons. A return might be chosen as part of a specific compliance project focusing on a particular industry or issue. Referrals from other taxpayers, law enforcement agencies, or media reports can also lead to an audit.

Tax Return Items That Attract IRS Attention

Reporting substantial business losses, particularly on a Schedule C for a sole proprietorship, can raise a red flag. Consistent losses year after year may suggest to the IRS that the activity is a hobby rather than a for-profit enterprise. The IRS may question whether the taxpayer is improperly using hobby losses to offset other taxable income. Taxpayers should be prepared to show evidence of their business-like operations.

Claiming unusually large deductions in proportion to your income is another common trigger. For example, if a taxpayer with an adjusted gross income (AGI) of $70,000 claims $30,000 in charitable contributions, this would be well outside the norm. This applies to other itemized deductions as well, such as medical expenses. Taxpayers must maintain meticulous records for all claimed deductions.

The home office deduction is frequently flagged because of its historically high rate of improper claims. To qualify, a portion of your home must be used exclusively and regularly as your principal place of business. Claiming a deduction for a home office that is also used for personal activities is not permitted. Similarly, deducting 100% of a vehicle’s use for business is a significant flag, as it is rare for a vehicle to be used solely for business. Taxpayers must keep detailed mileage logs to substantiate their business use claims.

Cash-intensive businesses, such as restaurants, hair salons, and car washes, are watched more closely due to the higher potential for underreporting income. The IRS also has specific compliance initiatives aimed at taxpayers with foreign bank accounts. Failing to file a Report of Foreign Bank and Financial Accounts (FBAR) for accounts totaling over $10,000 can lead to severe penalties and an audit.

Audit Probabilities by Income Level

The likelihood of an audit varies significantly based on adjusted gross income (AGI). Data shows that both the lowest and highest earners face the greatest audit risk, while middle-income taxpayers have the lowest probability of examination.

Filers with lower incomes, particularly those claiming the Earned Income Tax Credit (EITC), have a disproportionately higher audit rate. The EITC has complex eligibility rules related to income, family size, and filing status, which leads to a high rate of unintentional errors. The IRS dedicates resources to verifying EITC claims, often through correspondence audits.

Conversely, audit rates increase sharply for high-income individuals. While taxpayers earning between $25,000 and $200,000 have historically faced audit rates below 0.2%, the probability rises for those with higher earnings. For tax years 2013 through 2021, the IRS examined 8.7% of returns filed by individuals reporting $10 million or more in income. The more income you report, the more likely the IRS is to take a closer look.