Paper Returns vs. Electronic Returns: Assessing the Audit Risk

Filing taxes is an essential obligation for individuals and businesses alike. While the process can be daunting, it’s crucial to approach it with accuracy and attention to detail to minimize the chances of an audit. One factor that can influence the likelihood of an audit is the method of filing: paper returns versus electronic returns. This article delves into the differences between these two methods, examining their respective error rates and the potential impact on audit risk.

Error Rates: A Comparative Analysis

The Internal Revenue Service (IRS) maintains that filing tax returns electronically can significantly reduce the risk of errors and, consequently, the likelihood of an audit. Statistics provided by the IRS reveal a stark contrast in error rates between paper and electronic returns.

  • Paper Returns: The error rate for paper returns stands at a concerning 21%. This means that approximately one in five taxpayers who file their returns on paper make mistakes that could potentially trigger an audit.

  • Electronic Returns: In contrast, the error rate for electronic returns is remarkably low, hovering around 0.5%. This substantial difference highlights the inherent advantages of electronic filing in terms of accuracy and reducing the risk of errors.

Reasons for the Disparity in Error Rates

The significant disparity in error rates between paper and electronic returns can be attributed to several factors:

  • Human Error: Paper returns are more susceptible to human error during the manual data entry process. Mistakes can arise from misreading numbers, transposing digits, or omitting essential information.

  • Software Validation: Electronic filing software incorporates built-in validation checks that identify errors and inconsistencies in the data entered. This automated process helps prevent common mistakes and ensures the accuracy of the return.

  • Streamlined Process: Electronic filing streamlines the tax preparation process, reducing the chances of overlooking deductions, credits, or other important information.

Impact on Audit Risk

The higher error rate associated with paper returns inevitably increases the risk of an audit. The IRS relies on automated systems to process tax returns, and any discrepancies or errors detected can flag a return for further review.

  • Paper Returns: Due to the higher error rate, paper returns are more likely to be selected for audit. The IRS may scrutinize these returns more closely to verify the accuracy of the information provided.

  • Electronic Returns: The low error rate of electronic returns significantly reduces the chances of an audit. The IRS is less likely to question returns that have been filed electronically and have passed the validation checks.

Additional Considerations

Beyond the error rates and audit risk, there are other factors to consider when choosing between paper and electronic filing:

  • Convenience: Electronic filing is more convenient and time-saving compared to paper filing. Taxpayers can file their returns from the comfort of their own homes or offices, without the need to print, mail, or physically submit their documents.

  • Security: Both paper and electronic filing methods have their own security measures in place. Paper returns may be susceptible to loss or damage during mailing, while electronic returns may face cybersecurity risks. It’s essential to take appropriate precautions to protect sensitive tax information.

  • Accessibility: Electronic filing is more accessible for taxpayers who have access to computers and the internet. However, paper filing remains an option for those who prefer a traditional method or have limited access to technology.

The choice between paper and electronic filing for tax returns has a direct impact on the risk of an audit. Paper returns, with their higher error rate, increase the likelihood of being selected for audit. In contrast, electronic returns, with their low error rate and automated validation checks, significantly reduce the audit risk. Taxpayers should carefully consider these factors, along with their individual circumstances and preferences, when determining the best filing method for their tax returns.

Former IRS Agent Explains the Number One Reason You Get Audited, Its Your Audit DIF Score.


Which tax returns get audited the most?

Returns with extremely large deductions in relation to income are more likely to be audited. For example, if your tax return shows that you earn $25,000, you are more likely to be audited if you claim $20,000 in deductions than if you claim $2,000.

What income is most likely to get audited?

Audit trends vary by taxpayer income. In recent years, IRS audited taxpayers with incomes below $25,000 and those with incomes of $500,000 or more at higher-than-average rates. But, audit rates have dropped for all income levels—with audit rates decreasing the most for taxpayers with incomes of $200,000 or more.

Is it better to efile or mail taxes?

Filing your return electronically is faster, safer, and more accurate than mailing your tax return because it’s transmitted electronically to the IRS computer systems.

What raises red flags with the IRS?

Overestimating home office expenses and charitable contributions are red flags to auditors. Simple math mistakes and failing to sign a tax return can trigger an audit and incur penalties. Taxpayers should report all income from Form W-2, Form 1099, and any cash earnings.

Does e-filing a tax return increase your chances of being audited?

E-filing your return can impact your return’s accuracy, so it’s important that you understand how that might increase or decrease your chance of being audited. Generally, the IRS audits returns within only the previous one to three years. Although the IRS routinely audits large corporations, audits of individual tax returns are rare.

What percentage of tax returns are audited by the IRS?

In recent years, the IRS has audited significantly less than 1% of all individual tax returns. Plus, most audits are handled solely by mail, meaning taxpayers selected for an audit typically never actually meet with an IRS agent in person. Also, increased audits won’t happen overnight.

How often does the IRS audit a tax return?

Generally, the IRS audits returns within only the previous one to three years. Although the IRS routinely audits large corporations, audits of individual tax returns are rare. To reduce bureaucracy, the IRS has pushed to make e-file the primary method for filing tax returns, so e-file no longer stands out as a filing method.

Why is my tax return selected for audit?

Sometimes a tax return is selected for audit at random, the agency says. Other times, the IRS might audit you because your return involves transactions with another audited return — such as an investor or business partner. But the IRS often selects taxpayers based on suspicious activity.

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