Are You Afraid of Getting Audited by the IRS?

During tax season each year, the Internal Revenue Service (IRS) finds itself in a position to crack down on tax evaders trying to cheat the federal government. So, how do they figure out who owes money in tax debt? 

Audits are the primary tool the IRS uses to collect the money owed to the government by tax cheats. These audits also serve an even more important purpose, though – they help deter fraud from happening in the first place.

The mere idea of being faced with an audit is such a stressful deterrent that approximately six out of every ten taxpayers cite this as their motive for being truthful about their taxes. 

More IRS Audits for the Wealthy on the Horizon

n recent years, the IRS has made it its mission to elevate the number of audits for taxpayers with an annual income of $400,000 or higher. They view this as a way to raise revenue for the federal government and be stricter about handling pesky tax dodgers. 

This endeavor is being funded by the Inflation Reduction Act of 2022, a new federal law that aims to reduce government inflation by reducing the federal budget’s income deficit. After the government passed the law, many voters expressed concern about facing an audit themselves. 

In Reality, How High Are the Odds?

You may be wondering, what are the actual odds of you being audited? The answer may surprise you. 

The chances of the average person filing their income tax return being faced with an audit are shockingly low, despite the fear the thought instills in so many. A measly 0.2% of tax filers in 2020 were faced with an audit, according to data from the IRS. Overall, that equates to approximately 1 in every 500 people are audited for their tax returns on a yearly basis. 

All that said, there are some folks that do face a much higher chance of getting audited by the IRS. Studies show that the income level most likely to face an audit for their tax debt are those with annual incomes of $10 million or more. The IRS audited approximately 2.4% of those tax returns in 2020. 

Surprisingly, the second most likely income-based group of people to be audited are those with a low to moderate income level who claimed the Earned Income Tax Credit (EITC).

What is the EITC, and Why Can It Trigger an IRS Audit?

The Earned Income Tax Credit (EITC) assists workers and families with low to moderate incomes who need a tax break. The amount of the credit depends on several factors, including whether or not you have children or your disability status. If you qualify for the EITC, you can use the potential credit to reduce the amount you owe in tax debt or even increase the potential for a refund. 

People who claim the EITC face a higher audit rate, a fact that has raised some eyebrows and sparked criticism from many policy experts. In fact, the Bipartisan Policy Center has made note that these audits tend to fall in a disproportional manner on people of color – mainly because they are more likely to qualify for the tax credit. 

EITC Claims Can Differ – Along with Your Chances of An Audit

The EITC is not a one-size-fits-all package. Taxpayers can claim different amounts based on their income, the number of dependents they care for, and several other factors. For example, a person filing single with zero dependents can only claim a maximum of $600. However, a married couple who files jointly, with three children and an income of $63,398 or less, can claim a maximum EITC amount of $7,430. 

Returns with a claim for the EITC are more likely to get flagged if the IRS has records that show the individual does not actually qualify for all or part of the credit—for instance, claiming a child who isn’t eligible (if they are 19 and over but are not a full-time student). On average, 8 in 10 audited returns with claims for the EITC either misrepresented their reported income or claimed an unqualified child, according to a 2022 report from the National Taxpayer Advocate. 

Even still, this type of audit is not the end of the world, as it is far different from the type a wealthier taxpayer would generally face. Generally, the IRS relies on “correspondence audits” to handle EITC issues. These are handled via letters and phone calls rather than a more imposing in-person visit from an IRS agent – the way that high-income taxpayers are faced with audits. 

So, Are Most Taxpayers Actually More Likely to Be Audited by the IRS Nowadays?

Surprisingly, the chances are actually relatively low. If we take a look at the statistics, the audit rate has been steadily declining for years. 

In 2014, the IRS agency audited somewhere in the ballpark of 9.4% of all tax returns for people earning at least $10 million per year. According to IRS data, that figure is nearly four times the current audit rate. 

Middle-class income earners are also far less likely to be audited nowadays. The IRS shows that the 2014 audit rate for taxpayers earning $50,000 to $75,000 was 0.4%. Today, that number is nearly four times lower.

What is the reason for this drastic shift? The IRS claims this is partly due to a rapidly shrinking workforce. Back in 2022’s fiscal year, the agency employed around 79,000 full-time workers. That is a staggering 9.1% decline from 2013. In an effort to combat this shift, the IRS is now bulking up its staff numbers with help from the Inflation Reduction Act funding. They are focusing on increasing the number of audits for people earning at least $400,000 or more. 

So, try to remain calm about the possibility of an IRS audit. The odds are likely to be overwhelmingly in your favor.