What Are the Chances of Being Audited in 2020?

The likelihood of being audited by the IRS is relatively low, with only 0.63% of individual tax returns selected for audit in 2020, or fewer than one out of every 100 returns. This represents a significant decrease from the spike in audit rates observed in 2010.

Factors that Increase the Risk of an Audit

While the overall probability of an audit is low, certain factors can increase your chances of being selected:

• High Income: Individuals with higher incomes are more likely to be audited, with those earning over $500,000 facing higher-than-average audit rates.

• Unreported Income: Discrepancies between the income reported on your tax return and the amounts reported to the IRS by employers or other sources can trigger an audit.

• Excessive Deductions: Itemized deductions that significantly exceed the average deductions claimed by taxpayers in your income range may raise red flags.

• Self-Employment: Businesses operating primarily with cash, particularly those reporting losses, are more likely to be audited.

• 100% Business Use of Vehicle: Claiming 100% business use of a vehicle, especially without another personal vehicle registered in your name, can draw IRS attention.

• Hobby Losses: Attempting to portray a hobby as a business to claim business expenses can result in the IRS reclassifying the expenses as non-deductible hobby expenses.

• Home Office Deduction: Home office deductions require strict adherence to the “regular and exclusive” use requirement, and deductions from individuals earning wages may receive increased scrutiny.

• Business Meals, Travel, and Entertainment: These expenses must be carefully documented, including the business purpose and attendees, to avoid IRS scrutiny.

• Earned Income Tax Credit (EITC): The IRS closely examines EITC claims due to a high incidence of errors and fraud.

• Cryptocurrency Transactions: The IRS has increased enforcement efforts to address potential fraud in cryptocurrency transactions.

• Early Withdrawals from Retirement Accounts: Unreported early withdrawals from retirement accounts that do not meet the criteria for tax-free treatment can trigger an audit.

How Far Back Can the IRS Audit?

Typically, the IRS has three years to audit tax returns. However, in cases of significant errors or fraud, they may go back further, though usually not more than six years.

What to Do If You’re Audited

If you receive an audit notice from the IRS, respond promptly and cooperatively. Most audits can be handled by mail, but complex audits or those involving significant amounts of money may require in-person meetings with an auditor. Consider consulting a tax professional for guidance, especially if the audit is complex.

Understanding the factors that can increase your risk of an IRS audit can help you ensure the accuracy and documentation of your tax return. While the chances of being audited are low, it’s important to be aware of the potential triggers and take steps to minimize your risk.