Being audited by the IRS can be a stressful and intimidating experience. Many taxpayers wonder just how likely it is that they will be audited. The good news is that the overall individual audit rate is quite low, though it varies depending on income level and deductions claimed. Understanding the key factors that make an audit more likely can help taxpayers file accurately and avoid unnecessary IRS scrutiny.
What is the audit rate for individuals?
The overall audit rate for individual tax returns is less than 1%. For the 2019 tax year, the IRS audited 0.45% of individual returns. This is down substantially from 1.1% in 2010. So being audited remains relatively rare for most individual taxpayers. However, audit rates vary significantly based on income.
Tax returns reporting over $1 million in income had an audit rate of 6.66% for 2019. Returns with income between $500,000 and $1 million had a 1.9% audit rate. For those earning $200,000 to $500,000, the audit rate was 0.52%. It drops to 0.2% for incomes between $50,000 and $200,000. For returns reporting income under $25,000, the audit rate was only 0.05%.
So while the overall individual audit rate is low, higher earners face considerably higher odds of being audited. Still, even for millionaires, the vast majority do not get audited each year.
Why are higher incomes audited more frequently?
The IRS focuses its limited audit resources on higher income returns because that is where the most tax revenue is at stake. Auditing wealthier taxpayers helps the IRS maximize the amount of taxes and penalties it can collect.
Higher incomes also tend to have more complex returns involving business income, capital gains, rental property income, and other types of taxes. With more moving parts, there are simply more potential issues to be reviewed and double-checked. The IRS does not have the resources to audit every taxpayer, so they aim to get the most bang for their buck by reviewing more complex, higher income returns.
Of course, audits are based on more than just income level. Issues like large charitable deductions, high business expenses, or claims of substantial casualty losses can also flag a return for audit regardless of income. But focusing on higher earners allows the IRS to best utilize its limited enforcement budget.
Does the type of income impact audit odds?
Beyond total income, the IRS also looks at what types of income are reported, which affects audit potential. About 1% of returns reporting wage and salary income get audited. This applies to most regular W-2 employees.
The odds increase for taxpayers with income from sources the IRS considers more prone to errors or fraud. For returns reporting business income, the audit rate rises to 1.4%. For rental real estate activities, it increases to 2.3%.
Partnership or S corporation income is audited at a 1.9% rate. Farm income returns see an audit rate of 2.4%. Taxpayers reporting capital gains from investment sales have a 1% audit rate.
As these statistics bear out, non-wage income like business, rental, or farm activities raise your audit risk. The IRS knows these types of income are less subject to withholding and reporting on third-party documents like W-2s and 1099s. That makes it easier to inadvertently or deliberately underreport income and expenses. Auditing more returns with this type of income allows the IRS to catch errors and fraud.
Do very low incomes get audited more?
While high earners bear the brunt of IRS audits, returns at the very bottom of the income scale also face increased scrutiny. For returns reporting no income at all, the audit rate rises to 5.3%. The IRS understands that it is very rare for someone to have zero income.
In most cases, the “no income” returns are filed by taxpayers trying to obtain fraudulent refunds through false claims, like the Earned Income Tax Credit. Auditing these returns allows the IRS to crack down on cheating and improper refunds. So if you report zero income, be aware that the chances of audit increase dramatically.
How do credits and deductions impact audit risk?
Beyond income level and type, the credits and deductions claimed also influence audit potential. With credits like the EITC for low earners and the Child Tax Credit, there are strong incentives for taxpayers to claim these generously.
Unsurprisingly, the statistics bear this out. For returns claiming the EITC, the audit rate jumps to 2.4% compared to 0.5% for returns without EITC claims. For taxpayers claiming the Child Tax Credit, the audit rate is 1% versus 0.2% for those not claiming it.
Charitable contributions are another area ripe for abuse and exaggeration, so higher deductions get extra scrutiny. Taxpayers deducting over $25,000 in charitable donations have a 3.4% audit rate. Once donations exceed $500,000, the odds spike to 11.8%.
Business travel and meal deductions are often padded, so high amounts raise questions. For returns deducting over $75,000 of these expenses, the audit rate hits 6%.
In short, the bigger the deduction, the more likely the IRS will want to verify its accuracy. So tread carefully when claiming large write-offs for charitable gifts, business meals, travel, or other potentially questionable expenses.
Do audits focus on any key professions?
Due to the nature of their work, tax returns for certain professions face heightened scrutiny from the IRS. For lawyers and health care professionals, an audit is three times more likely than average. With extensive training and high earning potential, the IRS suspects doctors and lawyers may be more aggressive in seeking tax advantages.
Real estate agents have double the average audit odds, given widespread cash payments and opportunities to hide income. Gambling industry workers also get twice as many audits, since their cash tips and income are hard to trace.
Other possible “red flag” careers include building contractors, waiters/waitresses, auto and parts dealers, and cash-intensive businesses like gas stations and pizza shops. Returns for these lines of work tend to get extra attention from IRS examiners.
Does state residency impact IRS audit rates?
Where you live also plays a role in audit selection. States with large populations understandably have the most audits in sheer numbers, like California, New York, Florida, and Texas.
But accounting for state population size, which states are most audit-prone? Southern states tend to have the highest odds, including Mississippi, Louisiana, Kentucky, South Carolina, and Alabama.
Northern states with the lowest audit rates include Vermont, Maine, New Hampshire, and Minnesota. On the West Coast, Oregon and Washington have the lowest audit rates.
Why the geographic discrepancy? Potential factors include greater presence of cash businesses and fewer information reporting requirements in the South. The IRS may also suspect more unreported income from sources like rental properties in warmer Southern states. There are likely economic and demographic reasons for the variation, but location definitively influences your audit prospects.
Do math errors increase audit risk?
Simple mathematical mistakes on your return can also raise audit risk. Even small errors in arithmetic, incorrect Social Security numbers, or neglecting to sign your return increase your chances of getting audited. The IRS calls these “correspondence audits” done via mail. They accounted for 75% of individual audits in 2019.
Why does the IRS care about math errors? In part, because mistakes make the return immediately suspect. But unlike full field audits, correspondence audits are easy and cheap for the IRS to conduct. Checking for inaccuracies allows them to catch some tax issues efficiently.
So double-checking your return for careful accuracy is critical if you want to avoid attracting unnecessary IRS scrutiny over a basic math mistake or oversight.
Do past audits increase your odds of future audits?
As the saying goes, “once bitten, twice shy.” This applies to IRS audits as well. If you have been previously audited, you are somewhat more likely to get audited again.
Reasons for this include incorrect issues triggering the initial audit, or broader problems with your return history. If sloppy practices led to the first audit, they may continue in subsequent years. Or auditors may now view you as higher risk.
That said, a past audit is just one of many factors influencing audit selection. Simply having been audited before does not guarantee future scrutiny. But it does modestly increase the chances, so be extra thorough if you have been down that road already.
How can you get selected for an audit?
Now that we have covered the main factors driving audit rates, how does the IRS actually select returns to examine? There are a few key methods.
First, computer scoring algorithms comb through every return looking for anomalies. These programs flag issues like unusually high deductions, math errors, or income inconsistencies. Computer scoring allows the IRS to automatically identify suspect returns.
Some audits are selected randomly as part of the IRS’s National Research Program. These random audits help them gauge overall voluntary compliance and fine tune their audit algorithms.
IRS examiners can also personally select a return while reviewing related taxpayer files. If they spot a questionable issue, they can initiate a related audit of that taxpayer’s return.
Finally, whistleblower complaints can trigger an audit. Disgruntled employees, ex-spouses, or other sources sometimes report suspected tax evasion, generating an IRS inquiry.
In most cases, the computer flags the majority of audits based on objective anomalies. But random selection, examiner choices, and whistleblower tips also spark some audits.
While the overall individual audit rate remains low, your chances can increase substantially based on income, deductions, profession, and even where you live. But diligently reporting all your income, maintaining thorough supporting records, and avoiding obvious red flags can minimize your audit prospects. The IRS favors clear taxpayer transparency.
With sound documentation and reporting practices, an audit should pose little concern even if you fall into higher risk categories. Recall that over 99% of taxpayers go unaudited each year, so the odds remain favorable. But understanding risk factors provides helpful context on IRS audit selection, especially if something seems amiss in your return.