Will Tax Audits Increase in 2023?

Despite the rumors, the typical taxpayer doesn't need to worry.

The IRS has been sorely underfunded for years. And that's led to a world of consequences.

On a basic level, inadequate funding had forced the IRS to limit its staff, subjecting taxpayers to long wait times when they call to speak to an agent. (This especially applies during tax season.) A lack of staff has also meant backlogs to process paper tax returns -- and a delay in refunds hitting recipients' bank accounts. 

Then there are audits to think about. IRS audits are actually quite rare, namely because the agency doesn't have enough workers on staff to conduct them. 

But now, some taxpayers may be worried that's going to change. The IRS recently received a huge round of funding as part of the Inflation Reduction Act, and a portion of those funds is set to be allocated to enforcement. But the good news is that average wage earners do not need to worry about their chances of an audit going up in 2023.

Average earners shouldn't be impacted

Statistically speaking, tax-filers reporting no income or incomes over $1 million have the highest audit rates. Middle earners have an extremely low audit rate. And that's unlikely to change in the coming year. 

The IRS is now in line for $80 billion in funding under the Inflation Reduction Act. But when we look at how that money is supposed to be allocated, it's clear that if anything, average earners might benefit from it, not get hurt by it.

Here's how that $80 billion breaks down:

• Enforcement: $45.6 billion
• Operations support: $25.3 billion
• Business system modernization: $4.8 billion
• Taxpayer services: $3.2 billion

Let's talk about taxpayer services. Ideally, the IRS will use a good chunk of its funding to hire more staff and offer more assistance to taxpayers who need help filing a return or simply have questions outside of tax season. And if the agency manages to staff up nicely in the coming years, it could lead to faster processing times for paper returns -- and quicker refunds.

Of course, it's the enforcement portion of that funding that has a lot of people worried. But the IRS has repeatedly said that taxpayers should not anticipate an uptick in audits among filers earning under $400,000 a year. And that means the typical American doesn't need to worry.

How to reduce your audit risk

Most tax audits aren't as scary as the media might make them out to be. Typically, they involve getting a letter from the IRS asking for more information about a recently filed return. But if you'd like to do what you can to reduce your risk of getting audited, follow a few simple rules:

• Always report all income, including side gig wages and capital gains from brokerage account investments.
• Only claim reasonable, legitimate deductions.
• Try to claim deductions that make sense for your income level (if you report $30,000 in tax deductions against a $45,000 income, that might look suspicious).

Ultimately, the best way to avoid an audit -- and get through one unscathed -- is to be honest. If you do that, you might manage to stay off of that IRS list, even if you're a higher earner.