Taxes are one of life’s certainties, but getting audited by the IRS is increasingly less certain these days. In fact, an audit is about half as likely as it was five years ago.
Even so, some groups face higher audit rates than others.
The tax agency is auditing fewer individual taxpayers not because we’re more honest, but because the IRS is working with fewer employees. The agency’s workforce has dropped from 94,000 workers in 2010 to roughly 78,000 in the most recent fiscal year, according to IRS data.
With fewer agents available to perform audits, the agency’s audit rate has been whittled to 0.45% of individual returns in fiscal 2019, the IRS said recently. That compares with an audit rate of 0.9% in the fiscal 2014.
Two types of taxpayers are more likely to draw the attention of the IRS: the rich and the poor, according to IRS data of audits by income range.
Poor taxpayers, or those earning less than $25,000 annually, have an audit rate of 0.69% — more than 50% higher than the overall audit rate. It also means low-income taxpayers are more likely to get audited than any other group, except Americans with incomes of more than $500,000.
The least likely group to get audited? That would be upper-middle-class households with an annual income of $100,000 to $200,000. Their audit rate, at about 0.44%, is low because their returns have less room for error, says Glenn DiBenedetto, director of tax planning for New England Investment and Retirement Group. This group likely receives W2s from their employers, data that the IRS can verify, and relies on the standard deduction rather than itemizing, which cuts out the potential for fudging some deductions.
It may seem counterintuitive that low-income households are more likely to get audited than some wealthier taxpayers, but it’s due to the IRS checking for fraud and errors related to the Earned Income Tax Credit, says Eric Bronnenkant, head of tax at financial-services firm Betterment. The EITC is a tax credit for low- to medium-income taxpayers, who can receive a credit worth as much as $6,600 if they have at least three children.
“If you are a single parent with multiple children and with income in the $25,000 range, that is likely the person who will likely get the most amount of money from the EITC,” he notes. “One of the problems is there is EITC fraud.”
As many as one-quarter of EITC claims contain an error, often due to the complexity of the credit’s rules, according to the Center on Budget and Policy Priorities. That heightens the IRS’ interest in examining low-wage workers’ returns for errors, tax experts say. But fraud also exists, such as when families game the system by splitting up children between married parents who then both file as head of household to maximize credits, the IRS says.
Audit rates sharply spike for taxpayers with an annual income of more than $500,000. In fact, wealthy taxpayers with annual income of at least $10 million have the highest audit rate of all groups, at more than 6%.
“Statistically, the people over $10 million still have the highest percentage, but their rate of audit is declining,” DiBenedetto says.
With the reduction in IRS staff, all income groups have seen a decline in their audit rates, although the rich have enjoyed a sharper reduction than the poor. For instance, Americans with annual incomes of more than $10 million have enjoyed a 75% decline in audit rates since 2013, according to the most recent data from the IRS. The audit rate for taxpayers earning less than $25,000 has dipped about 30% during the same period.
Deduction red flags
Some types of taxpayers may receive more scrutiny because they have more room to fudge the numbers, tax experts say.
Take self-employed workers, who can enjoy a host of deductions that aren’t available to other employees, such as the home office deduction and write-offs for business expenses.
Deductions for self-employed workers not only reduce their income subject to federal and state income taxes, but for payroll taxes, points out Betterment’s Bronnenkant. That can provide an incentive for some people “to make up a deduction,” he notes — potentially drawing the interest of the IRS.
Another red flag is tax returns with round numbers, says DiBenedetto. Taxpayers might be tempted to “round up,” by, say, estimating a charitable contribution at $1,000, but that can flag the IRS that a taxpayer may not be reporting the exact amount they spent or donated, he adds.
The best defense is to keep detailed records and receipts for expenses and deductions, tax experts say.
“Number one is keeping all of your receipts for all of your expenses,” Bronnenkant says. “Candidly, most people are pretty awful about that.”