Filing taxes is stressful enough in its own right. Throw the idea of getting audited into the mix, and it can throw even the most diligent taxpayer into a panic. But audits have decreased in recent years, largely because the IRS has been underfunded and understaffed.
That's all changing in 2020, though.
The IRS anticipates an uptick in funding for the upcoming year, which means the agency will have more manpower to handle taxpayer inquiries and process returns more quickly. The agency also plans to update its computer systems for more accuracy on the tax-filing front.
Much of this is good news for taxpayers. But the one drawback is that with more resources at its disposal, the IRS may get more aggressive in its audit practices. Consider yourself warned.
Who gets audited, anyway?
Statistically, your chances of getting audited are fairly low, with less than 1% of returns receiving a second look from the IRS each year. That said, some filers are more likely to land on the audit list than others -- specifically, those who earn very little or no money, and those who earn a lot.
Case in point: The audit rate among filers with income of $10 million or more is 6.66% (as per statistics from the 2018 tax-filing season). For filers with incomes between $1 million and just under $10 million, it ranges from 2.21% to 4.21%. And among those who report no income, it's 2.04%.
By contrast, the audit rate among filers with incomes of $25,000 to $500,000 is roughly 0.5%, which means that if you're a typical earner, your chances of having your return further scrutinized are pretty low. Even filers with incomes between $500,000 and just under $1 million have an audit rate of 1.10% -- twice that of more moderate earners, but not exceptionally high, either.
Lower your audit risk
No matter what your earnings look like, there are steps you can take to reduce the chances of landing on that dreaded audit list. For one thing, be sure to report all of your income. That includes earnings from a side gig, investments, commissions, and even the interest your bank pays you on your savings. Most of the time, income earned outside of your salary gets documented on a 1099 form, and for each of these forms you receive, the IRS gets a copy as well. When those details don't match up because you fail to report your income, the agency could be inspired to give your return a closer look.
Additionally, keep accurate records so you know what deductions to claim. Guessing at those numbers, or coming up with remarkably round numbers (like an even $6,000 on medical expenses, for example) is a good way to get your return flagged.
Furthermore, aim to claim deductions that are proportionate to your income -- and if they're not, be prepared with documentation. It could be that you genuinely can claim mortgage interest on a $600,000 home loan despite only earning $40,000 a year, but if that's the case, expect the IRS to question how you can afford such a costly home on that income.
Finally, file your taxes electronically rather than on paper. The error rate for electronic returns is less than 1%, but for paper returns, it's 21%. The IRS will often correct genuine math mistakes without putting you through the audit process, but you're better off not making them in the first place.
Though tax audits aren't always the harrowing process you might expect them to be, you're generally better off avoiding them. Be mindful when filing your taxes to stay off that list.