The mere mention of an IRS audit can send shivers down the spines of taxpayers. However, the reality is that the chances of facing an audit are surprisingly low for most individuals. This article delves into the statistics, misconceptions, and factors that determine the likelihood of an IRS audit, providing valuable insights for taxpayers seeking to minimize their risk.
Myth: Everyone Gets Audited
Contrary to popular belief, not everyone is subject to an IRS audit. In fact, the overall probability of being audited is approximately 1 in 200. This means that the vast majority of taxpayers can rest assured that their returns will not be scrutinized by the IRS.
Declining Audit Rates
The number of IRS audits has been on a steady decline in recent years. This trend is attributed to several factors, including budget constraints, a reduction in the IRS enforcement workforce, and a shift towards taxpayer service rather than enforcement.
Who Gets Audited the Most?
While the chances of being audited are generally low, certain factors can increase the likelihood of an audit. These include:
- High Income: Individuals earning over $500,000 per year have a higher probability of being audited.
- Self-Employment Income: Sole proprietors are up to five times more likely to be audited than wage earners.
- Foreign Accounts: Maintaining financial accounts overseas can raise red flags for the IRS.
- Digital Assets: Owning cryptocurrencies or other digital assets may increase the chances of an audit.
- Charitable Deductions: Claiming excessive charitable deductions relative to income can trigger an audit.
Triggers for an IRS Audit
The IRS uses sophisticated algorithms to identify returns that warrant further examination. Some common triggers for an audit include:
- Large Deductions: Deductions that are significantly out of proportion to income can raise suspicions.
- Certain Deductions: Deductions for travel, auto expenses, and casualty losses are often scrutinized by the IRS.
- Business Losses: Businesses that consistently report losses may be subject to an audit to verify their legitimacy.
- Missing Information: Filing a return with missing schedules or incomplete information can increase the chances of an audit.
- Sloppy Returns: Returns with mathematical errors or round numbers may indicate a lack of care and attention to detail.
- Inconsistent Reporting: Discrepancies between the information reported on tax returns and W-2s or 1099s can trigger an audit.
- Intent to Mislead: Evidence of deliberate attempts to mislead the IRS, such as fabricating expenses or underreporting income, can result in an audit.
Does a Large Refund Trigger an Audit?
Not necessarily. However, if a refund is the result of fraudulent claims or inaccurate reporting, it can increase the likelihood of an audit.
What Happens If You Get Audited?
If you receive an audit notice, it’s important to remain calm and respond promptly. The IRS offers three types of audits:
- Correspondence Audit: The IRS sends a letter requesting additional information or documentation.
- Office Audit: You meet with an IRS agent at an IRS office to discuss specific items on your return.
- Field Audit: An IRS agent visits your home or business to conduct a more thorough examination.
Getting Help With a Tax Audit
If you’re facing an IRS audit, it’s advisable to seek professional assistance from a tax accountant or attorney. They can guide you through the process, represent your interests, and help you minimize your tax liability.
While the chances of being audited are generally low, understanding the triggers and factors that increase the risk can help taxpayers take proactive steps to minimize their exposure to an IRS audit. By filing accurate and complete tax returns, avoiding questionable deductions, and maintaining proper records, taxpayers can significantly reduce their likelihood of facing an IRS examination.
Former IRS Agent Explains the Number One Reason You Get Audited, Its Your Audit DIF Score.
FAQ
Does everyone eventually get audited?
What are the chances of being audited?
How do they pick who gets audited?
Can you avoid getting audited?
Are You at risk of getting audited?
But the risk of getting audited currently stands at a decade-long low. The audit rate for individual tax filers was 0.25% in 2019, down from 0.9% in 2010, according to a May study from the U.S. Government Accountability Office. Audit rates for all income levels declined over that period. The reason for the decline: A loss of IRS staff and funding.
Can a person be audited?
While auditing can happen to anyone, there are a few things that increase the chances of being selected. Things like rounded, even numbers on a return, rental income, and even home office deductions can increase a person’s chances of being audited.
What happens if you get audited by the IRS?
Additionally, the IRS says that having an association with someone else who’s under investigation could also yield an audit. Taxpayers who have made transactions with someone else under audit may also be chosen. What happens if you get audited? In the end, the IRS says that there are three possible outcomes from an audit. There could be no change.
What are the chances of being audited by the IRS?
Shockingly low for most people. The number of IRS audits has been declining for years. Today, an American’s overall chances of being audited are about 1 in 200. Moreover, three-quarters of all audits are correspondence audits in which the IRS sends the taxpayer a letter in the mail asking about one or two issues.