What Are the Triggers of IRS Tax Audits?

The words "IRS audit" have long struck fear into the hearts of American taxpayers. But what are the actual odds of getting audited? For many years, the odds have been shockingly low for most people.

Then, in 2022, Congress passed the Inflation Reduction Act, giving the IRS an additional $80 billion in funding. While this amount was reduced to about $61 billion in 2023, it's still the biggest budget increase the IRS has ever received, with over half of the funding earmarked for enforcement, including hiring. With this increased funding, audit rates were expected to increase, focusing on larger businesses and high-income individuals.

However, on January 20, 2025, President Trump signed an executive order halting the hiring of federal employees, including IRS staff, until his administration determines it's in the "national interest" to lift the freeze. So, the odds of getting audited will likely remain very low. Moreover, even if you get audited, three-quarters of all audits are correspondence audits in which the IRS sends the taxpayer a letter in the mail asking about one or two issues.

What Happens When the IRS Audits You?

Taxpayers call them "audits," while the IRS prefers "examinations." No matter what you call them, an audit (or examination) involves the IRS probing into your financial affairs. Generally, subject to a few exceptions, your tax return can't be audited after three years from its original filing date.

The three levels of IRS audits are correspondence, office, and field.

Correspondence Audits

With a correspondence audit, the audit comes in the form of a mailed letter. In this type of audit, the IRS requests that you mail information or documents (or additional payment) instead of meeting with you, for example, to support a deduction you took. Correspondence audits are the simplest type of audit.

Office Audits

If you get selected for an office audit, you set an appointment with the IRS for an in-person interview at an IRS office to go over certain items from your tax return. You can have someone represent you at the meeting, such as a certified public accountant or attorney, which might be a good idea.

Field Audits

If you get a letter notifying you of an audit and asking to meet at your home or business, you've been selected for a field audit. Field audits are a big deal. Field audits yield more tax revenue than correspondence and office audits—four times higher than that from other types of audits. Consider consulting or hiring a tax professional to assist you.

Who Gets Audited the Most?

Again, the IRS has three years to audit most returns after they are filed. Here are the IRS statistics showing how many returns filed in 2021 were audited. (These figures on "exam coverage rates" show returns audited within the normal three-year statute of limitations. The percentage could increase in future years as additional audits are completed.)

(Source: IRS Data Book, 2023, page 36.)

In FY 2023, there was no increase in audits of tax returns for taxpayers making under $400,000 per year. (Source: IRS releases 2023 Data Book describing agency's transformation through statistics.)

Who Is Audited More Often?

Oddly, people who make less than $25,000 have a higher audit rate. This higher rate is because many of these taxpayers claim the earned income tax credit, and the IRS conducts many audits to ensure that the credit isn't being claimed fraudulently.

Also, as you might expect, wealthy taxpayers are audited more often than the less affluent—after all, that's where the money is. But even millionaires are facing less IRS scrutiny than in the past.

What Triggers an IRS Audit?

The IRS uses sophisticated computer algorithms to decide on which returns to audit. If your return looks strange, your chances of being audited go way up. Here are 11 reasons the IRS might audit you.

1. Taking Large Deductions

Returns with extremely large deductions in relation to income are more likely to be audited. For example, if your tax return shows that you earn $25,000, you are more likely to be audited if you claim $20,000 in deductions than if you claim $2,000.

2. Claiming Certain Kinds of Deductions

Certain types of deductions have long been thought to be hot buttons for the IRS, especially auto, travel, and meal expenses. Casualty losses and bad debt deductions might also increase your audit chances.

3. Claiming a Business Loss

Businesses that show losses are more likely to be audited, especially if the losses are recurring. The IRS might suspect that you must be making more money than you're reporting—otherwise, why would you stay in business? Most likely to be audited are taxpayers reporting small business losses.

4. Claiming Deductions That Don't Make Sense

Deductions that seem odd or out of character could increase your audit chances, like a plumber who deducts the cost of foreign travel might raise a few eyebrows at the IRS.

5. Not Reporting All of Your Income

The IRS also goes to great lengths to ensure you report all of your income. Its computers match the information on W-2s and 1099-NEC forms with the income amount reported on tax returns using Social Security and other identifying numbers. If the IRS finds discrepancies, it will probably start asking questions.

6. Having Evidence of Intent to Mislead or Being Sloppy With Your Return

Filing a tax return with missing schedules or not providing all the information asked for on the forms can increase your chances of being audited. Similarly, a sloppy return, especially with math mistakes, increases your chances of an audit. Also, using round numbers—for example, $6,000 for business advertising costs or $4,000 for transportation expenses—indicates that you're estimating, not using records to report amounts.

7. Being a Higher Earner

If you make over $1,000,000 per year, your audit likelihood is greater than the likelihood for the general population.

8. Having Self-Employment Income

The IRS tends to be suspicious of people in business for themselves. Depending on their income, sole proprietors are up to five times more likely to be audited than wage earners.

9. Having Foreign Accounts

Keeping money or other assets in foreign banks or other financial accounts increases audit chances.

10. Owning Digital Assets

Having digital assets, including cryptocurrency, such as Bitcoin, might increase your chances of an audit. IRS Form 1040 asks whether you received, sold, exchanged, or otherwise disposed of a digital asset during the year. If you say "yes," your answer increases your audit chances.

11. Claiming Too Many Charitable Deductions

Claiming $20,000 in charitable deductions on your $50,000 salary will probably make the IRS suspicious. And if you don't have documentation to back up your charitable deductions, don't deduct them.

Does a Large Refund Trigger an Audit?

Not necessarily. But if the refund is a result of fraudulent claims, such as inaccurately reporting income or claiming deductions you're not actually eligible for, then it can trigger an IRS audit.

What Happens If You Get Audited and Don't Have Receipts?

If you don't have all your receipts, you can, within limits, offer oral explanations, use approximations for some expenses, claim business expenses under $75 without receipts, and reconstruct records when the originals are missing.

• You might be able to claim you're in substantial compliance with the tax laws, meaning you have enough proof that you followed the tax reporting law even though you're missing some receipts. Be prepared to give a reasonable explanation to the auditor as to why you can't produce a record.
• In addition, you can claim business deductions for expenses without a receipt up to $75 per item unless it's a lodging expense. (Lodging expenses always require receipts.) And even if you don't have a receipt, you'll need some kind of record, like a bank statement showing the amount was for your business.
• You're also allowed to "reconstruct" lost or destroyed records. For example, if you show you had sufficient records at one time, but no longer do because of circumstances beyond your control (such as a fire or flood destroyed your records), you can reconstruct them. However, whether an auditor will accept them is up to the auditor. You'll also need to provide a reasonable explanation about why the records are missing.

Do You Get a Refund If You Get Audited?

If you go through a tax audit and, as a result, there are changes to your tax return, this adjustment usually causes additional tax liabilities, not a refund. But in some cases, the changes might result in the IRS owing you money, leading to a tax refund.

What Happens If You Are Audited and Found Guilty?

If an auditor finds you haven't reported all of your income and aren't entitled to all credits, deductions, and exemptions claimed on your tax return, you might face a bigger tax bill, penalties, interest, and in rare and serious cases (such as fraud or tax evasion), jail time.

Is the IRS Increasing Audits?

In the past, IRS audits were far more common. In 1963, an incredible 5.6% of all Americans had their tax returns audited. Everybody knew someone who had been audited. Jokes about IRS audits were a staple topic of nightclub comedians and cartoonists.

Several reasons have contributed to decreasing IRS audit rates since that time:

• a decline in the IRS budget
• a reduction in the IRS enforcement workforce
• an increase in the IRS workload
• emphasis on taxpayer service rather than enforcement
• legal changes that made it more difficult for the IRS to go after tax cheats, and
• the impact of the COVID-19 pandemic, which resulted in the closure of IRS offices for months.

Today, the IRS has fewer auditors than at any time since World War II. President Trump's executive order, which applies more harshly to the IRS than other federal agencies, means that the expected IRS ramp-up likely won't happen. The hiring freeze could potentially reduce the agency's ability to investigate taxpayers.

Getting Help With a Tax Audit

To learn more about dealing with tax audits and the IRS, get Nolo's Stand Up to the IRS, by Frederick W. Daily and Stephen Fishman.

If you need more help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS. Also, be aware that you can appeal the results of an audit.