How Many Taxpayers Are Audited Each Year?

The question of "what are my chances of being audited?" is one of the most common worries among taxpayers. The word "audit" alone can cause anxiety, but for most people, the process is far less intimidating than they imagine. This article breaks down the latest IRS statistics, explains what factors increase the likelihood of an audit, and clarifies what happens if your return is selected for review.

Understanding the Numbers: A Look at Recent IRS Audit Rates

First, let's establish a baseline. According to the most recent IRS Data Book, the Internal Revenue Service audited just 0.38% of all individual income tax returns filed in calendar year 2021. That translates to roughly 1 audit for every 263 returns filed. This rate is near a historic low, largely due to IRS budget constraints and staffing shortages over the past decade.

However, that single number is deceptive. The real story isn't the overall audit rate but how that rate changes based on income level and return complexity. The probability of an audit isn't evenly distributed; it rises significantly as income grows.

Here’s a look at the examination rates by individual, non-business income for the tax year 2019 (the most recent year with complete data by these brackets):

• No Adjusted Gross Income (AGI): 2.0%
• $1 to $25,000: 0.6%
• $25,000 to $50,000: 0.3%
• $50,000 to $75,000: 0.2%
• $75,000 to $100,000: 0.2%
• $100,000 to $200,000: 0.2%
• $200,000 to $500,000: 0.3%
• $500,000 to $1,000,000: 0.6%
• $1 million to $5 million: 1.5%
• $5 million to $10 million: 3.2%
• $10 million or more: 9.2%

As you can see, taxpayers earning over $10 million were more than twenty times as likely to be audited as those earning between $200,000 and $500,000. It’s also important to note the expected trend. With substantial new funding earmarked for enforcement, the IRS plans to significantly increase exam rates, particularly for high-income earners and complex partnerships and corporations. These historically low rates are not expected to last.

Who Gets Audited? Key Audit Triggers

The IRS doesn't have the resources to review every return, so it uses powerful automated systems to flag returns with the highest probability of errors. While some audits are truly random, most are selected for specific reasons. Here are the most common triggers that can draw IRS scrutiny.

High-Level Income

This is the most straightforward factor. As shown in the statistics above, the more you earn, the higher your audit risk. High-income returns often involve complex investments, business structures, and deductions, giving the IRS more to examine and presenting a greater potential for tax adjustments.

The Discriminant Information Function (DIF) Score

The primary tool the IRS uses to select returns is a secret computer program called the Discriminant Information Function, or DIF. This system compares returns against a set of norms and assigns each one a score. A high DIF score indicates that the return has characteristics suggesting a high potential for unreported income or overstated deductions. Returns with high scores are then passed to a human agent for a formal review to decide if an audit is warranted.

Unreported Income

The IRS excels at matching information. Its systems automatically cross-reference the income you report on your return against third-party informational returns like W-2s from employers and 1099 forms from clients or financial institutions (e.g., Form 1099-INT for interest, 1099-DIV for dividends, 1099-NEC for freelance income). A mismatch between what a third party reports paying you and what is reported on a return is one of the easiest ways to trigger an automatic notice and potential audit.

Large and Unusual Deductions

Your return is compared to others in a similar income bracket. Claiming unusually large deductions for your income level can raise a red flag. For instance, if a taxpayer with a $150,000 income claims $50,000 in charitable contributions, the system may flag that as abnormal. The same goes for large, unsubstantiated business expenses, home office deductions that seem too aggressive (like claiming 60% of a home's area), or extensive meal and entertainment expenses.

Filing a Schedule C for a Business With Continued Losses

Self-employed individuals report their business income and expenses on Schedule C. The IRS understands start-ups and small businesses may not be profitable immediately, but it expects businesses to eventually make money. If a Schedule C filer reports substantial losses year after year, it can trigger what is known as the "Hobby Loss Rule." The IRS may question whether the activity is a genuine business entered into for profit or simply a hobby. If it’s deemed a hobby, the losses cannot be used to offset other income.

Claiming the Earned Income Tax Credit (EITC)

Due to the complex rules around qualifying children, income, and marital status, the EITC has a historically high error rate. As a result, returns claiming this credit face a higher-than-average examination rate. That's why meticulous record-keeping and double-checking eligibility are so important for these taxpayers.

Types of Audits: Not All Audits Are Created Equal

An audit doesn’t always mean an IRS agent is coming to your office. In fact, most examinations are much simpler and handled entirely through the mail.

• Correspondence Audit (Mail Audit): This is the most common and least intrusive type of audit. Over 70% of audits are conducted this way. You will receive a letter from the IRS (often a CP2000 notice) requesting more information about a specific item, such as an unreported Form 1099 or a questionable deduction. The entire process is handled by sending the requested documentation back to the IRS.
• Office Audit: This is a more involved examination where the taxpayer and/or their representative (their CPA or Enrolled Agent) is required to visit a local IRS office. These audits are typically focused on a limited number of specific issues and require bringing records to substantiate the reported items.
• Field Audit: This is the most comprehensive and in-depth form of audit. An IRS agent will visit the taxpayer's business or accountant's office to conduct a full review of books and records. Field audits are reserved for complex individual returns and businesses, and are often initiated when the IRS suspects more significant errors exist.

What Happens If Your Business is Selected for an Audit?

If you receive an audit notice, your role as a trusted advisor becomes more important than ever. Calm, methodical execution is everything.

1. Read the Notice Carefully: First, confirm the authenticity of the notice. Then, identify the type of audit, the tax year under examination, and exactly what information is being requested. Pay close attention to the response deadline, which is typically 30 days.
2. Gather Your Documents: Assemble all relevant records related to the items in question—receipts, bank statements, canceled checks, mileage logs, legal agreements, and any other supporting documentation. A well-organized response from the start sets a professional tone.
3. Handle All Correspondence: As the designated representative, you should handle all communications with the IRS. Advise your client not to contact the auditor directly. Your expertise ensures the conversation stays focused on the specific items under review and prevents clients from inadvertently providing damaging information.
4. Understand the Outcomes: An audit can end in three ways. A "No Change" result means the IRS reviewed the information and accepts the return as filed. An "Agreed" result means the IRS proposed changes, and you and the client agree with them after a review. The final and most complex outcome is "Disagreed," where you believe the auditor's findings are incorrect, which can begin the formal appeals process.

An audit is an information-gathering and verification process. By being organized, responsive, and working through a qualified representative, most taxpayers can resolve the matter with minimal stress.

Final Thoughts

While the overall chance of an audit is low for the average taxpayer, the risk changes with income, business activities, and specific deductions. Knowing the triggers and what the different types of audits consist of lets you prepare tax returns more defensively and respond confidently if and when the IRS sends a notice.

Building a defensible position for a return or responding effectively to an audit notice starts with knowing precisely what the tax code says. Instead of spending hours hunting through IRS publications for the right citation, we use Feather AI to get clear, citation-backed answers in seconds. It ensures our positions are supported by authoritative sources, giving us and our clients peace of mind.