What Are the Chances of Being Audited?

The words "IRS audit" have long struck fear into the hearts of American taxpayers. We've all heard horror stories about "audits from Hell" that leave taxpayers exhausted and broke. To help scare people into filing, around tax time every year the IRS makes sure to publicize its audits of famous people. But what are the real odds of getting audited? Shockingly low for most people. The number of IRS audits has been declining for years. Moreover, three-quarters of all audits are now correspondence audits in which the IRS sends the taxpayer a postal letter asking about one or two issues. As a result, the traditional IRS office audit may soon become a real rarity.

Here's a breakdown by income of the percentage of individual returns audited by the IRS during fiscal year 2017:

Overall, the chance of being audited fell to 0.6%. That means that only 1 out of every 167 returns was audited. This was the lowest audit rate since 2002, and the seventh annual decline in a row.

Indeed, for most taxpayers, the chance of being audited is even less than 0.6%. For taxpayers who earn $25,000 to $200,000 the audit rate is less than 0.5%—that's less than 1 in 200. Oddly, people who make less than $25,000 have a higher audit rate. This is because many of these taxpayers claim the earned income tax credit and the IRS conducts many audits to ensure that the credit is not being claimed fraudulently.

As you might expect, wealthy taxpayers are audited more often than the less wealthy—after all, that's where the money is. But even millionaires are facing less IRS scrutiny. Only 2.21% of taxpayers earning $1 million to $5 million were audited in 2018. This was the lowest audit rate for millionaires since the IRS first began tracking it in 2004. In contrast, 9.5% of these taxpayers were audited in 2015.

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.

There are several reasons for plummeting IRS audit rates:

• a decline in the IRS budget—Congress has cut the IRS budget by almost 19% from 2010 levels
• a reduction in the IRS enforcement workforce by 38% since 2010
• an increase in the IRS workload
• emphasis on taxpayer service, rather than enforcement, and
• legal changes enacted in 1998 that made it more difficult for the IRS to go after tax cheats.

According to the IRS Oversight Board, the IRS does not have the resources to pursue at least $30 billion worth of known taxes that are incorrectly reported or not paid. The nation's “tax gap”—the total inventory of taxes that are known and not paid each year—was most recently estimated at $458 billion.

Does this mean you can always get away with cheating on your taxes? Absolutely not. Even though audit rates are historically low, the IRS still audited 892,197 individual tax returns in 2018. 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. For example:

• 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.
• 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 may also increase your audit chances.
• Businesses that show losses are more likely to be audited, especially if the losses are recurring. The IRS may suspect that you must be making more money than you are reporting—otherwise, why would you stay in business?
• Deductions that seem odd or out of character could increase your audit chances—for example, a plumber who deducts the cost of foreign travel might raise a few eyebrows at the IRS.

The IRS also takes great pains to ensure that you report all of your income. Its computers match the information on employee Form W-2s (the wage and tax statement your employer gives you) and 1099-MISC forms issued to non-employees with the amount of income reported on tax returns using Social Security and other identifying numbers. Discrepancies usually generate questions by the IRS. These computer checks are not counted in the IRS audit statistics.