You may not like to think about the IRS looking too closely at your tax return, and hearing the words “IRS audit” probably makes you nervous. We’ve all heard stories about taxpayers being hit hard by audits. Maybe you’ve even heard about celebrities getting audited, which always seems to make the news around tax season. However, what is your real risk of being audited, and what can result in one? Let’s dive in and break it down in a simple, easy-to-understand way.

What Are the Odds of Getting Audited?

First off, your chances of being audited are actually pretty low. In fact, they’ve been dropping for years. At present, roughly 1 in 200 tax returns are taken to be an audit (i.e., 0.5% of all returns filings). So, most people won’t get audited. And even if you do, there’s a good chance it’ll just be a letter in the mail asking for some more information.

However, things might change in the future. The IRS is getting more funds and planning to hire thousands of new agents to improve its overall processes. This means they’ll have more resources to conduct audits, especially for higher-income individuals and large businesses.

How Does an IRS Audit Work?

An IRS audit is basically a review of your tax return to ensure everything is accurate. The IRS may verify your income, deductions, and credits to make sure you reported everything correctly.

Here are the different types of IRS Audits,

Correspondence audits: These are the most common and least stressful. The IRS sends you a letter requesting additional information on specific components of your return. You mail back the documents they ask for—no need to meet anyone in person.

Office audits: In this case, you’re asked to come to an IRS office for an interview. They’ll want to go over specific items on your return. If you don’t want to face it alone, you’re allowed to bring a tax professional with you, such as a CPA or tax attorney.

Field audits: These are more serious. The IRS wants to visit you at your home or business to review your tax records in person. If you’re faced with this type of audit, it’s wise to hire a professional to help.

Line-by-Line Audits: It’s one of the most thorough and rarest types of IRS audits. Selected at random under the National Research Program (NRP), these audits involve a detailed examination of every line on your tax return. The goal is to assist the IRS in collecting data to refine their selection methods for future audits instead of targeting particular errors or differences. Although this kind of audit is not an event resulting from suspicious activity, taxpayers subject to it may, nevertheless, be billed for additional tax, interest, or penalty. Since it is a fairly detailed process, professional guidance, e.g., tax attorney or CPA, can be helpful to handle the audit successfully.

Who Gets Audited the Most?

IRS audit rates vary significantly across different income groups and corporate entities. Taxpayers with annual incomes below $25,000 have experienced higher audit rates in recent years due to the Earned Income Tax Credit (EITC). The IRS scrutinizes EITC claims to prevent improper payments, leading to an audit rate of approximately 1.27% for this income bracket, which is notably higher than the overall average audit rate of 0.25% in 2021. (Ref: KIPLINGER)

Conversely, middle and upper-middle-income earners face lower audit rates. In 2022, the audit rate for individuals with incomes between $200,000 and $1 million was only 0.6%. Even for millionaires, audit rates have declined remarkably. Only 1.1% of millionaire tax returns were audited in 2022, a significant drop from 8.4% fourteen years prior. (Ref: KIPLINGER)

For corporate taxpayers, audit likelihood increases with company size. The IRS plans to audit more than 22% of tax returns for corporations with at least $250 million in assets by 2026. In addition, the audit rate is expected to rise for large partnerships with assets over $10 million, with the IRS targeting a 1% audit rate by 2026, a significant increase from the 0.1% rate in 2019. (Ref: MARKETWATCH)

These trends reflect an aggressive balance in the IRS’s audit policy, targeting both low-income taxpayers claiming certain credits and large corporate entities in order to improve compliance across the spectrum.

Common Triggers for an IRS Audit

The IRS uses a computer system to identify tax returns that appear unusual. While there is no way to guarantee that you will not be audited, here are some common triggers that may increase your chances:

01. Taking Large Deductions

If your deductions seem high compared to your income, the IRS might take a closer look. For example, if you make $30,000 a year but claim $25,000 in deductions, that could raise some red flags.

02. Claiming Business Losses

Businesses, especially small businesses, can sometimes be a target for audits. The IRS is generally wary of businesses that report losses year after year. They may wonder how you’re in business if you’re always losing money. Make sure your losses are legitimate and well-documented.

03. High Charitable Donations

While it’s great to give to charity, claiming donations that are large compared to your income might catch the IRS’s attention. For example, if you make $40,000 a year and claim $20,000 in donations, you’ll have to ensure that you have receipts and records to substantiate it.

04. Reporting Self-Employment Income

Self-employed individuals are more likely to be audited. The IRS knows it’s easier to underreport income or inflate deductions when you work for yourself. Keeping detailed records is important if you run your own business.

05. Claiming Certain Deductions

Some deductions, such as travel, meals, and entertainment, often raise questions. When you declare a substantial number of these, especially if they seem unrelated to your business, the IRS will want to investigate. It’s best to claim only what’s necessary and keep receipts for everything.

06. Not Reporting All Your Income

The IRS matches the income you report with the forms it receives from employers and other sources. If you forget to include some income, even by accident, even unintentionally, the IRS will notice. Make sure you include all your W-2s, 1099s, and any other income forms when you file.

07. Large Refunds

While getting a large refund doesn’t automatically trigger an audit, it can if the refund is due to mistakes or fraudulent claims. Make sure the information you submit is accurate, and don’t try to inflate your refund by stretching the truth.

08. Having Foreign Accounts or Digital Assets

If you have money in foreign accounts or own cryptocurrency, such as Bitcoin, your chances of being audited increase. The U.S. Internal Revenue Service (IRS) has been paying more attention to digital assets and foreign holdings in recent years. You’ll need to report these if they apply to you.

09. Round Numbers on Your Return

If your tax return is full of round numbers (like $5,000 in business expenses), it might look like you’re estimating instead of using actual figures. This can make the IRS suspicious. Always report the exact amounts you spent.

10. Filing Sloppy or Incomplete Returns

If your return has mathematical errors or is missing schedules and forms, it increases the risk of an audit. Double-check everything before filing to avoid simple mistakes that could attract unwanted attention.

What If You Don’t Have Receipts?

If you get audited and can’t provide receipts for everything, don’t panic. You can explain some things, and for certain expenses, you can estimate or reconstruct records. For instance, the IRS allows you to claim certain business expenses under $75 without a receipt, but you’ll still need to have some sort of record like a bank statement.

If you lost your records because of something beyond your control, like a fire or flood, you can also try to reconstruct them. Just be prepared to explain your situation to the auditor.

What Happens If the IRS Finds Mistakes?

If the IRS audits you and finds mistakes, they may adjust your return, which usually means you owe more in taxes. You might also have to pay penalties and interest. In rare and extreme cases, such as if you’re caught committing tax fraud, there could be criminal charges, but this is not common.

Can You Get a Refund After an Audit?

It’s possible, but unlikely. Most audits result in people owing more money, not getting refunds. However, if the IRS finds that you overpaid, you could get a refund.

Is the IRS Increasing Audits?

The IRS has been auditing fewer people in recent years, but this trend may be reversing. Congress recently passed a bill that gives the IRS more money, and they plan to use it to hire more auditors. Their focus will likely be on larger businesses and higher-income individuals, but that could mean more audits overall in the future.

Final Thoughts

Although IRS audits may sound frightening, the chances of you getting audited are low. Most audits are straightforward and consist of just submitting some additional paperwork. To avoid drawing attention, make sure you file an accurate return and keep good records. If you ever get audited, having proper documentation will make the process much easier.

And remember, if you ever feel overwhelmed by the idea of an audit, it’s okay to get help. Whether it’s from a tax professional like a tax lawyer or even just using online resources, you don’t have to go through it alone.