Our office fields requests like “What are my Chances Of Being Audited” all the time. First, don’t panic. Audits are relatively rare, as fewer than 1% of taxpayers grouped by income level will get that dreaded notice on IRS letterhead.
For the average American earning $50-70K pr/yr, only about half a percent of those tax returns were audited. If you made between $25‒50K or between $75‒100K, less than half a percent of those returns were under audit. Only 6.66% of tax returns reporting an eight-figure adjusted gross income were audited as well. Additionally, the IRS has less funding and about one-third fewer agents on board compared to less than a decade ago. So this also keeps audit figures low.
To cut to the point right away, your chances are being audited by the IRS are quite slim. There are often many red flags that are likely to trigger an audit. But even then, you’re still more likely to get an examination notice than an actual field audit. (A field audit is where an IRS agent shows up at your door demanding to examine your workspace and files.) It’s just not that common.
An IRS Letter Won’t Likely Increase the Chances Of Being Audited
You might think that you’ve been selected for an audit because a letter from the IRS came in the mail. Don’t ignore the letter. It may just be a request for clarification. For example, why a line item on your tax return was reported a certain way. A notice is not the same thing as an audit.
Most IRS notices are computer-generated with a “CP” prefix. Notices in the CP series will be automatically mailed to you when changes are made to your IRS account, such as making a payment or having all or part of your tax refund seized to pay down your current balance. These notices are sent with the intent to catch discrepancies and underreporting based on information they already have on file. For example, if you forgot to report that 1099 you received for giving a side hustle a try. Or you mistyped your salary as $56,000 when $65,000 was reported on your W-2.
Requests for more information are often referred to as a “desk audit”. But your contact with the IRS is still largely minimal, particularly if your notice pertains to math or input errors.
Common Audit Red Flags
Despite having a pretty low chance of ever being audited, it’s helpful to know what may trigger one. Especially which criteria are the most likely to cause an audit:
Earning $200,000 or more per year.
Your chances of being audited increase once you enter the upper middle class. The higher your income, the higher the likelihood of being audited.
Home office deduction
Self-employed people in general are far more likely to be audited than people with regular jobs. But your chances go up big time when you take the home office deduction, even though it is a perfectly legitimate write-off. It’s not just the amount deducted, but home office deductions are subject to a “regular and exclusive use” rule. Many work-at-home types inadvertently violate this rule without even realizing it.
Suspiciously high charitable contributions
Any larger-than-average deduction is going to arouse suspicion, but charitable contributions are a common red flag. Many people donate to causes they care about, but cash donations are easy to substantiate, as are marketable securities. Did some spring cleaning and gave a lot to Goodwill? People often overvalue non-cash donations. And many folks don’t have the time to take pictures and document donations unless it’s an extremely valuable item. (For example: donating rare art to a museum that has a professional appraisal.)
Gig work and cash-intensive businesses
Consistent with the high audit rates among the self-employed, any cash-intensive type of work is an audit minefield. While ride share drivers get a 1099 and can properly track mileage with many apps and tools, discrepancies are common. Cash-heavy businesses like cafes, laundromats and selling items at craft fairs also provide opportunities to overstate expenses and understate income. These businesses often miss important substantiation of these numbers.
You should still take advantage of all the tax benefits legally available to you. Keep fastidious records that both you and your tax professional can easily access. This way, you can substantiate any claims if your tax filing situation is more complicated than just getting a W-2 from a job. Nevertheless, these situations are most likely to turn you into an audit statistic—so beware. If you are ever facing an audit, either as an individual taxpayer or a small business owner, we can help.
