The IRS is an institution that many Americans don’t like — or even fear — yet most don’t know much about it.
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This is particularly true when it comes to facts surrounding audits. Although no one wants to be audited, actual audit rates are so low that the persistent fear of them is almost irrational.
You’re Not Really Likely To Be Audited
The good news for most Americans is that it’s really, really unlikely that you will ever be audited, and those odds have actually been shrinking recently. In fact, from 2010 to 2019, the audit rate for individual income tax returns dropped to a minuscule 0.25%.
That popped up slightly to 0.41% for fiscal year 2021 — i.e., for every 100,000 tax returns, the IRS audited just 410.
Essentially, as long as you don’t call attention to your return by claiming huge deductions against no income or completely fabricating your data, your odds of being audited are beyond negligible.
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But If You Don’t Earn Much …
A statistical oddity that has many crusaders up in arms is that the audit rate for the lowest-income taxpayers is actually dramatically above average. Those with incomes of less than $25,000 saw an audit rate of 1.3% in fiscal year 2021, more than triple that of the national average.
Part of the reason for this increased audit rate is that lower-income taxpayers often claim no tax liability thanks to the myriad credits available to them. In fact, more than half of correspondence audits initiated by the IRS in the last fiscal year were sent to lower-income taxpayers who claimed the Earned Income Tax Credit.
Or If You Earn a Lot
What likely makes more sense to the majority of taxpayers is that the highest-income Americans are also audited at higher rates. In fact, they have the highest audit rate among any income group. According to the U.S. Government Accountability Office, the audit rate for those making $5 million or more was 2.35% in tax year 2019, the same year that the national average audit rate was just 0.25%. That’s almost a tenfold increase in audit rates for those higher-income taxpayers, by far the biggest audit rate among any income group.
Audits Generated Nearly $41 Billion in 2021
IRS audits are big business. The whole point of an audit is not to strike fear into the heart of American taxpayers — although it succeeds in doing that — but rather to raise revenue for the government from underpaid taxes.
To that end, for all of the negativity that the IRS receives, it actually succeeds quite well in its mission. In fiscal year 2021, IRS audits brought in nearly $41 billion in underpaid taxes.
Although no one wants to pay more taxes, that money was theoretically rightfully due to the U.S. Treasury and will be used to further American interests across the country. In that sense, the IRS serves a valuable mission for every American.
Most Audits Never Require Seeing an IRS Agent
Probably the greatest fear most Americans have regarding an audit is that they will have to sit face-to-face across a table with an IRS agent. While audits themselves are quite rare, the odds that you will have an in-person audit — or a so-called “field audit” — are exceedingly rare.
More than 70% of audits are instead correspondence audits, in which you receive a letter from the IRS. These audits are specific in nature, often asking for additional information regarding certain claims on your return. Other correspondence audits simply request an additional amount due based on IRS calculations.
While even getting a letter from the IRS can be nerve-wracking, the odds that you get called in for a full-blown, in-person audit with an agent are tiny.
IRS Audits Likely Will Ramp Up
Although the odds that you will be audited in 2023 and beyond are still extremely low, audits will no doubt be ramping up over the coming years. Legislation passed in 2022 allocates a whopping $80 billion in additional funding for the IRS over the next 10 years, meaning enforcement actions are likely to increase.
An estimated $600 billion in unpaid taxes are still undeclared every year, and the IRS wants to increase its revenue collection rates. How much audit rates will increase — and how they will be distributed across income levels — remains to be seen. However, audits are likely to rise across the board.
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