Who Gets Audited by the IRS the Most?

Terry Selb

October 18, 2023

Tax season is a time of year when many Americans experience anxiety and anticipation. While most people aim to file their taxes honestly and accurately, there is always the underlying fear of an audit by the Internal Revenue Service (IRS). The prospect of an audit can be daunting, and understanding the factors that may increase your likelihood of being audited is crucial for taxpayers. In this article, we’ll explore who gets audited by the IRS the most and what you can do to minimize your risk.

High Earners and the Wealthy

One of the primary groups that the IRS tends to focus on is high earners and the wealthy. The rationale behind this is straightforward: individuals with higher incomes tend to have more complex tax situations, investments, and financial activities that require closer scrutiny. Additionally, the potential for substantial tax evasion or underreporting of income is more tremendous among those with significant financial resources.

Business Owners and the Self-Employed

Business owners and self-employed individuals are at an increased risk of being audited due to the complexity of their tax situations. The IRS pays special attention to small businesses, sole proprietors, and independent contractors who may have more opportunities to underreport income, overstate expenses, or engage in tax-related misconduct. If you run your own business, it’s essential to maintain meticulous records and adhere to tax laws and regulations.

Deduction Claims and Tax Credits

Certain deductions and tax credits are more likely to trigger an audit. For example, the Earned Income Tax Credit (EITC) and the Child Tax Credit are common targets for scrutiny, as there have been fraud and improper claims. Similarly, claiming large deductions for charitable contributions, business expenses, or home office deductions can raise red flags if the IRS suspects abuse or exaggeration.

Offshore Accounts and Foreign Income

Taxpayers with offshore bank accounts or foreign income sources are under heightened scrutiny. The IRS has increased its efforts to combat tax evasion related to foreign accounts through measures like the Foreign Account Tax Compliance Act (FATCA). Failing to report foreign income or offshore assets can result in severe penalties and legal consequences, making these taxpayers a priority for audits.

High-Wealth Individuals and Estate Taxes

High-wealth individuals subject to estate taxes may also face audits, especially when the IRS believes there may be undervaluation of assets, improper deductions, or other estate planning tactics that violate tax laws. Estate tax audits ensure the government receives its fair share of estate taxes.

Random Audits and Data Matching

While some audits are targeted, others are random or the result of data discrepancies. The IRS employs sophisticated computer algorithms to match the data reported on tax returns with data they receive from employers, financial institutions, and other sources. If there are inconsistencies or discrepancies, taxpayers may be subject to an audit, regardless of their income level.

Small Businesses and the Gig Economy

The rise of the gig economy and the increasing number of freelancers, independent contractors, and gig workers have drawn the IRS’s attention. This is because income in these sectors is often paid in cash or through digital platforms, making it easier to underreport income. Small business owners and gig workers should be incredibly diligent in reporting all income accurately and keeping detailed records.

Home-Based Businesses

Home-based businesses are a particular area of focus for the IRS, especially if they involve deductions for home office expenses, utilities, or property depreciation. The line between personal and business expenses can sometimes be blurry, leading to potential audit triggers. Maintaining precise records and following the tax rules for home-based businesses is crucial.

Unfiled or Late Returns

Please file a tax return late to avoid increased scrutiny. The IRS takes unfiled returns seriously and may initiate an audit to ensure compliance. If you have unfiled returns, it’s essential to rectify the situation promptly and, if necessary, seek professional assistance.

Self-Prepared Returns

Tax returns prepared by the taxpayer without professional assistance can sometimes lead to errors or inaccuracies. While many successfully prepare their returns, self-prepared returns may have a higher chance of mistakes that could attract IRS attention. If you’re filing taxes, using reputable tax software and double-checking your return for errors is crucial.

Excessive Business Losses

Claiming substantial business losses year after year can raise concerns with the IRS. While businesses often incur losses, consistently reporting losses without showing any profit over an extended period may prompt an audit. The IRS may scrutinize such companies to determine if they are genuinely operating with the intent to make a profit.

Cryptocurrency Transactions

Cryptocurrency has gained prominence in recent years, and the IRS is increasingly interested in ensuring that individuals who engage in cryptocurrency transactions report their income accurately. Taxpayers in cryptocurrency trading, mining, or investment should know the tax implications and comply with tax regulations.

How to Minimize Your Risk of an IRS Audit

While some factors may increase your risk of being audited, there are steps you can take to minimize this risk:

Keep accurate records: Maintain thorough and organized financial records, including receipts, invoices, and documents related to deductions and credits.

Report all income: Ensure that you report all sources of income, including income from gig work, investments, and foreign accounts.

File on time: File your tax return by the deadline to avoid late filing penalties and IRS scrutiny.

Seek professional help: If your tax situation is complex or concerns about your tax return, consider working with a certified tax professional or accountant to ensure accuracy and compliance.

Stay informed: Keep up to date with changes in tax laws and regulations to ensure you comply with current requirements.

Use reputable tax software: If you prepare your taxes, use reputable tax software to minimize the risk of errors on your return.

Remember that while the risk of an IRS audit is a concern for many taxpayers, most audits result in no change to the tax return or a minor adjustment. Being transparent, accurate, and organized in your tax reporting is the best approach to minimize your audit risk and ensure compliance with tax laws.