Getting audited by the IRS can be a stressful and scary experience. No one wants to hear that they’re being audited. However, the odds of the average American actually getting audited are pretty low. In this article, we’ll take a look at the latest audit statistics and break down the odds of an audit based on income level and profession.
IRS Audit Rates
The IRS audited around 0.45% of individual tax returns in 2021. This was the lowest audit rate since the IRS began tracking audits in the 1960s. It’s down substantially from 1.1% in 2019 and a peak of 1.7% in 2010.
So why have audit rates declined so much in recent years? IRS budget cuts are a major reason. The IRS budget has shrunk by over 20% in inflation-adjusted dollars since 2010. With fewer resources for enforcement, the IRS has focused audits on higher income taxpayers while cutting back on audits of lower and middle income filers.
Audit Odds by Income
Your odds of being audited vary dramatically based on how much income you report on your tax return. Here are the 2021 IRS audit rates by income level:
| Income Range | Audit Rate |
| $25,000 and under | 0.01% |
| $25,000 – $50,000 | 0.17% |
| $50,000 – $100,000 | 0.32% |
| $100,000 – $200,000 | 0.49% |
| $200,000 – $500,000 | 0.83% |
| $500,000 – $1 million | 1.10% |
| $1 million – $5 million | 2.21% |
| $5 million – $10 million | 4.21% |
| Over $10 million | 6.66% |
As you can see, audit odds increase substantially as income rises. Taxpayers making $25,000 or less faced just a 0.01% audit chance. But for returns over $10 million, the audit rate jumped to 6.66%.
Why High Income Returns are Audited More
Higher income returns get extra scrutiny for a few reasons:
- Higher income taxpayers tend to have more complicated returns involving business income, investment income, itemized deductions, and other areas with high audit potential.
- Auditing wealthy taxpayers is more productive for the IRS. Collecting extra tax from high income audits brings in more revenue.
- Congress mandates audit focus on high income returns. Budget bills direct the IRS to devote resources to enforcing tax laws on higher earners.
Self-Employed and Small Business Audit Odds
If you’re self-employed or have a small business, your audit odds are higher than average. Here are 2021 IRS audit rates based on the type of return filed:
| Type of Return | Audit Rate |
| Individual (Form 1040) | 0.31% |
| Partnership | 0.21% |
| S Corporation | 0.23% |
| Fiduciary (estates, trusts) | 0.83% |
| C Corporation | 0.53% |
| Schedule C “sole proprietorship” | 1.56% |
| Farmers (Schedule F) | 2.02% |
Sole proprietors filing a Schedule C had the highest audit rate at 1.56%. Farmers with Schedule F returns were audited at an even higher 2.02% rate. Both groups tend to have more complex returns with expenses that can be challenged by the IRS.
Red Flags That Increase Audit Risk
Certain red flags on your return can increase your odds of audit. Watch out for:
- Business losses year after year
- Deducting excessive business meal, travel, or vehicle expenses
- Omitting income like cash payments or 1099 forms
- Claiming unrealistic deductions like 100% business use of a home office
- Math errors that lead to a refund
Proper documentation can help avoid issues if your return gets flagged. Keep receipts and mileage logs to back up business deductions.
Most Common Reasons for Audit
Certain parts of a return are most likely to trigger an audit. Here are the most frequent audit targets:
1. Reporting Business Income
Underreporting or failing to report your business income is one of the quickest ways to get audited. IRS computers match up the income you report against 1099 forms from clients and customers. Omitting 1099 income leads to automatic IRS notices.
2. Claiming the Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable credit for low income workers. Unfortunately, some taxpayers incorrectly claim the EITC or claim fake dependents to boost the credit. The IRS closely examines EITC claims – this credit was audited at a 3.5% rate in 2021.
3. Taking Business Deductions
Writing off excessive or unsupported business expenses is another common audit trigger. Make sure to keep receipts and records in case the IRS challenges a deduction. Home office and vehicle deductions are often closely reviewed.
4. Reporting Capital Gains
Forgetting to report capital gains from investments is an issue on many audits. The IRS receives 1099 forms on sales of stocks, bonds, real estate, and other assets. Be sure to report all taxable investment gains.
5. Claiming Rental Losses
If your rental property generates paper losses year after year, don’t be surprised if you get audited. The IRS limits deducting passive rental real estate losses. Keep good records to prove you’re operating your rental property like a true business.
How to Reduce Your Audit Risk
While getting picked for an audit largely comes down to chance and having a clean return, there are some things you can do to help avoid the bad luck of getting audited:
- Report all your income – leaving off sources of income is a huge red flag. Double check your tax documents to ensure you have included all 1099s, W-2s, and other reporting statements.
- Take conservative tax positions – don’t take overly aggressive stances to maximize deductions or credits unless you have rock-solid documentation to back them up.
- Keep meticulous records – having receipts, mileage logs, business purpose records, and other support can verify deductions if audited.
- Hire a tax preparer – having a reputable CPA do your return cuts down on errors that can lead to audit.
- Don’t stand out – avoiding unusually high business losses or charitable deductions can help your return blend in.
Even if you take these steps, however, getting audited sometimes comes down to bad luck. Do your best to ensure your return is complaint and then hope for the best.
What to Do if You Get Audited
If you do receive the dreaded letter from the IRS about getting audited, stay calm. Just because you’re getting audited does not automatically mean you did something wrong. Follow these steps to handle the audit process:
- Read the audit notice carefully. Determine specifically what part of your return the IRS is questioning.
- Gather any documents that support the deductions or income the IRS is auditing.
- Consider hiring a tax professional to represent you in the audit if it involves complex issues.
- Be polite and professional with the IRS auditor. Explain your position but don’t argue.
- If the IRS identifies issues, you can appeal the proposed changes within 30 days.
- If you owe more tax, work out a payment plan or payment options.
While getting audited is stressful, the worst case is usually paying a little more tax plus interest and penalties. If you made an honest mistake, the auditor may not even assess penalties. About 85% of audits don’t result in the taxpayer owing additional tax. Stay calm, make your case, and remember the odds are still low!
Conclusion
Audit rates have fallen substantially in recent years as IRS budgets declined. In 2021, just 0.45% of individual returns were audited. Your odds increase dramatically with income. Earners under $25,000 faced just a 0.01% audit chance. But for returns over $10 million, the audit rate jumped over 6%. Schedule C and Schedule F filers also face elevated audit odds due to more complex returns.
Getting picked for audit comes down to luck in many cases. But taking steps like reporting all your income, keeping solid records, and avoiding overly aggressive deductions can reduce your risks. If you do get that dreaded audit letter, stay calm and make your case. The odds are still good that even if audited, your return will pass inspection without requiring additional tax.
