Are the words IRS audit enough to send shivers down your spine? For many, the mere thought of subjecting their finances to scrutiny by an IRS agent, who wields the authority to demand hefty sums in back taxes, is enough to evoke fear. It’s no wonder that the prospect of an audit instills such dread. Tax matters are notoriously intricate, and even those striving to fulfill their obligations may stumble in their calculations.
The anxiety stemming from potential errors, coupled with the intrusive nature of a government examination into one’s financial affairs and the looming specter of significant financial liabilities, including penalties, renders the notion of an audit undeniably daunting. Yet, what are the actual odds of facing such a scenario? Surprisingly, the likelihood of an audit is often lower than commonly perceived—save for one unexpected demographic of taxpayers.
Here’s the likelihood of facing an IRS audit
According to data from Transactional Records Access Clearinghouse, an impartial, nonprofit research center affiliated with Syracuse University, the chances are remarkably slim. In fact, the probability of undergoing this adult nightmare is akin to the likelihood of believing in monsters under your bed during childhood.
To put it into perspective, out of the 164 million individual tax returns filed for the 2022 tax year, the IRS audited only 626,204—down from 659,003 the previous year. However, it’s worth noting that the majority of these audits didn’t resemble the traditional notion of an audit; instead, they involved the IRS simply requesting additional information in writing.
For a genuine audit, which entails an active investigation and direct communication with an IRS agent, the count for 2022 stood at 93,595. This translates to an audit rate of approximately 3.8 out of every 1,000 returns, giving taxpayers a mere 0.38% chance of being audited—a decrease from the 0.41% rate in 2021.
Therefore, while the possibility of undergoing an audit exists in theory, the odds are quite low.
A Particular Demographic Faces Heightened Risk
Although the overall likelihood of an audit remains relatively low, there’s a distinct group that encounters significantly greater risk — and it’s not the demographic one might expect. Surprisingly, rather than millionaires facing heightened audit probabilities, it’s low-income wage earners who claim the Earned Income Tax Credit (EITC).
This segment of taxpayers faces nearly three and a half times the audit chances compared to the average individual taxpayer, primarily because the IRS finds it easier to identify discrepancies in EITC claims than to navigate the intricate financial affairs of millionaires. In 2022 alone, there were 12.7 audits per 1,000 returns filed by low-income wage earners (translating to a 1.27% audit probability) compared to 3.8 audits per 1,000 returns filed by all other individual taxpayers.
This doesn’t imply that claiming this credit is unwise, as it holds significant value for lower earners. However, it underscores the importance of maintaining accurate documentation and ensuring eligibility for direct bank deposits of the funds. Utilizing reliable tax preparation software can streamline much of this process.
In summary, while the overall audit risk remains modest, it does exist, especially for low-income earners claiming the EITC. Thus, it’s crucial to seek assistance in correctly filing taxes, whether through reputable tax software or professional accounting services, to preempt any concerns should the IRS initiate an inquiry.