Make Under $500,000 a Year? Your IRS Audit Risk Is Under 1% — But One Common Mistake Can Change That

Internal Revenue Service audits typically happen within three years after an individual files their tax returns. That time frame is subject to change, especially if discrepancies are spotted by the agency during the screening process.

However, IRS audits have noticeably gone down in the past years, particularly after US President Donald Trump repealed funding for the agency. Depending on how much a person makes, a tax expert shared that the chances of getting audited by the IRS have changed significantly.

'If you are making less than $100,000, less than $500,000, your audit risk is less than 1%. If you're making $1 million to $3 million, your audit risk jumps up to 1.2%. If you're making over $10 million, your audit risk jumps up to 2.6%. IRS releases this every single year,' Karlton Dennis, a tax expert, claimed on The Iced Coffee Hour.

IRS Audit Numbers Expected To Spiral Even More

The huge drop in IRS audits is a bit surprising, and Dennis warns that these statistics could go even lower. With plans to hire more IRS agents falling through, the tax strategist shares how that initiative never materialised.

Comparing the frequency of IRS audits at the moment to years back, the numbers are significantly low. As mentioned in the discussion, it was pointed out how back in the 90s, those earning $10 million had a 10-plus percent audit rate. Now, those rates have gone down, as mentioned by Dennis, to just roughly 2.6%.

'We're gonna see less audits happen over the next few years and less IRS agents,' Dennis explained.

Moving forward, questions are in the air on whether the relevancy of IRS audits will remain. With attention towards it noticeably going down, the National Association of Tax Professionals (NATP) contends that IRS audits will remain but will be limited.

A Warning Sign for Tax Payers

Limited as the IRS audit efforts may be, the NATP warns that the current situation could lead to something dire—particularly for high-wealth taxpayers or organizations who are not turning in the right reports.

Rather than worry about the declining IRS audit numbers, the data that the agency is collecting may be part of something bigger. With the limited data, the IRS may be working on what information they have to identify and go after high-risk and high-wealth tax payers who would likely have higher-impact cases.

Hence, the drop in IRS audits is a bit surprising but should in no way mean that any taxpayer should let their guard down. It would still be best to file taxes properly and avoid getting flagged for discrepancies. This would trigger scrutiny from the IRS that could lead to dire consequences.

Avoiding IRS Attention

The last thing that any taxpayer would want is to attract attention for dubious IRS reporting. There are several instances when the agency would flag any individual or entity for audit.

The most common of them all is underreporting income. Dennis explains why this is at the top of the list of reasons why people get audited.

'When you are a 1099 individual, you are receiving a 1099, which means someone has reported how much they have paid you. If you forget to submit a 1099, you are underreporting income. This is the number one way people will get audited,' Dennis said.

After that, he mentioned that mistakes and omissions are the second way people get audited.

After that, he mentioned mistakes and omissions are the second way people get audited.

'If you make a mistake on the return, you filed a return and you labeled someone's social security wrong, forgot someone's birthday... these are things that can actually trigger IRS audit,' he shared.

Other IRS Audit Triggers

Among them include high deductions or tax breaks. According to tax experts, the agency relies on software to flag shady returns that fall outside the standard normal deductions compared to earnings.

Another is refundable tax credits. The agency looks at this item more intently. According to Victoria Boon, a tax consultant and someone who has worked for the IRS before, this is something the agency will scrutinise intently.

'Any kind of refundable credit ... the IRS is going to scrutinize a little bit more,' she said.

The IRS audit frequency may be noticeably declining. However, that doesn't mean that they are going away anytime soon. So for tax payers, it would still be best to file their reports the traditional way and avoid getting flagged for discrepancies to avoid risky audits.