I won't keep you in suspense. The IRS audits less than 1% of all tax returns. However, this doesn't tell the whole story. There are several factors that can make your chances of an audit more or less likely, such as your income and whether or not you claim certain "red flag" deductions. With that in mind, here's a thorough look at how likely you might be to receive an IRS letter or phone call about your tax return.
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The overall odds of an IRS audit
During the 2015 fiscal year, the latest for which complete data is available, the IRS audited about 0.8% of all tax returns, or one in every 120 households.
In 2017, I wouldn't be surprised if the audit rate is even lower. The IRS's funding has been slashed in recent years, to the point where l the IRS publicly admitted that as many as half of the people who call with questions about their taxes might not even get their calls answered. In the midst of these funding cuts, the IRS audit rate dropped from 1.1% in 2010 to 0.8% in 2015. While IRS funding was increased slightly in 2016, further cuts are set for 2017, and I can't imagine the Republican government will be eager to throw more money the IRS's way anytime soon.
Income makes a big difference
Perhaps the biggest factor that determines your likelihood for an IRS audit is your income. Specifically, if your income is much higher or lower than the average American household, your chances of being audited get significantly higher.
It's easy to understand why. After all, the IRS has limited resources to enforce the tax laws, so it allocates more of its efforts where they're more likely to result in additional tax revenue. For instance, if the IRS audits someone who earned $50,000 last year, they may find a couple errors and collect a few hundred dollars' worth of unpaid taxes. On the other hand, an error uncovered in a tax return with a $50 million income is likely to bring in quite a bit of additional tax revenue.
On the lower end, there's simply a lot of potential for abuse, such as unreported income and the claiming of credits and deductions that the taxpayers aren't entitled to. The IRS is especially wary when the information on a tax return simply doesn't make sense. For example, if you reported no income whatsoever last year, but donated $5,000 to charity and claimed a mortgage interest deduction on a $500,000 home, the IRS may want to take a closer look.
The difference in audit probability can be substantial. Taxpayers with a $60,000 adjusted gross income (AGI), for example, have just a 0.47% chance of being audited. On the other hand, a household with AGI of $7 million has a 19.4% chance. Here's the full breakdown:
|
Adjusted Gross Income (AGI) Range |
% of Tax Returns Audited |
|---|---|
|
$0 |
3.78% |
|
$1-$25,000 |
1.01% |
|
$25,000-$50,000 |
0.50% |
|
$50,000-$75,000 |
0.47% |
|
$75,000-$100,000 |
0.49% |
|
$100,000-$200,000 |
0.64% |
|
$200,000-$500,000 |
1.54% |
|
$500,000-$1,000,000 |
3.81% |
|
$1,000,000-$5,000,000 |
8.42% |
|
$5,000,000-$10,000,000 |
19.44% |
|
$10,000,000 or more |
34.69% |
|
Overall Average |
0.80% |
Source: TaxFoundation.org.
Deductions and other things the IRS watches for
In addition to income, there are a few other factors that increase your audit risk. Filing a Schedule C for business income is one. If you file a Schedule C with your tax return that shows gross receipts between $25,000 and $100,000, your audit risk jumps to 2.4%, far above the overall averages for that income range in the chart above.
There are several other red flags that the IRS tends to take a closer look at. You can read a more thorough discussion of some these here, but generally speaking, these are the tax breaks that carry the most potential for abuse. The home office deduction, for example, has very specific requirements -- a clearly defined space in your home must be used solely for business. Well, the IRS knows that it's easy enough to call a computer cart in your bedroom an "office", so the agency may want to verify its legitimacy.
Or, if any of your deductions are significantly higher than average, the IRS may want to take a closer look. Business meals and entertainment expenses are another area that's easy to abuse, and therefore tends to raise eyebrows at the IRS, especially when your profession typically doesn't have those expenses.
The bottom line
Even if your odds of a tax audit are rather high, you shouldn't be worried as long as you were truthful on your tax return, and you can back up every deduction you claimed. And if you do get audited, the audit process is less scary than you probably think it is. In fact, most IRS audits are conducted by mail, and if you are entitled to the deductions/credits in question, resolving the situation is a simple matter of sending in the proper documentation.
