Man Surprised

Chances of an IRS Audit in 2022?

I always have a sense of accomplishment when I file my taxes. Most of you are also resting easy by April 15…unless you file for an extension, in which case you have until September 15th  to file a business return and October 15th  for individual returns.  The only thing left to worry about after filing your taxes is getting audited. The IRS generally has three years to initiate an audit. Just the thought of an audit strikes fear in most Americans.

What are your chances of an IRS Audit?

The IRS has a smaller budget and 20% fewer staff than they did in 2010.  So, the number of audits has been declining steadily for over a decade. Overall, the chance of an individual’s tax return being audited is currently only around 0.4%.

However, the more you earn, the higher your chances. Naturally, the IRS has limited resources, so it concentrates on those returns likely to bring in the most additional dollars. Although, claiming no income also increases your chance of an audit. For example, for 2018,  Households with AGI under $200k had a 0.48% chance of being audited, AGI between $200 – $500k had a .53% chance, AGI of $500k – $1 MM had a 1.1% chance, $1 – $5 MM had a 2.2% chance, $5 – 10 MM had a 4.2% chance, and over $10 MM had a 6.66% chance. 

Top 10 Triggers of an IRS Audit: 

How does the IRS decide whom to audit? Well, that’s the secret sauce. Each return is assigned a score, and certain items can increase the chance your return being selected for audit. The IRS does not publish what those “red flags” are, but here are the top 10 that are commonly believed to increase your chances:

  • Using a tax preparer who has a bad reputation with the IRS.
  • Unusually large charitable deductions. For example, if you earn $100k and give $50k to charity that may raise a red flag.  
  • Entering rounded-off numbers in your return.
  • Pretending a hobby is really a business that perpetually loses money.
  • Excessive deductions for meals/travel/entertainment. These are harder to deduct since 2018 based on changes in the Tax Cuts and Jobs Act. Read about those changes HERE.
  • Claiming 100% business use of a vehicle.
  • Claiming the home office deduction. There are specific rules, which you can read about HERE.
  • Filing a Schedule C with your tax return. Schedule C is for self-employed business income earned as a sole proprietor. Your audit risk jumps if your Schedule C shows revenues between $25,000 and $100,000.
  • Foreign bank accounts.
  • Not claiming all your income (The IRS gets copies of your 1099s and W-2s.)
  • Big changes in income from the prior year.

The good news if you get audited:

The good news is that if you do get audited, 70% are simple correspondence audits handled by mail. The most common scenario is the IRS requests records to verify a specific claim on your return. This is less stressful than an office audit, where you go to the IRS office and meet an auditor face-to-face.  The worst scenario is called a field audit, which is when the IRS comes to your home or place of business. For more information, check out: What to Expect If You Get Audited.

Approximately nine out of 10 audits result in a change in tax liability.  The average correspondence audit results in an additional $7,000 owed and the average field or office audit results in additional taxes due of $65,000.  One potential silver lining if you get audited is the government may owe you money.  Every year thousands of audits result in refunds to the taxpayer.

The bottom line is your chance of getting audited is very low and most audits are no big deal…as long as you didn’t cheat on your taxes, which I know none of you did. 🙂