How Likely Is a Tax Audit?

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Matthew Frankel, The Motley Fool

Updated Mon, Apr 23, 2018, 4:03 AM

Now that the tax deadline has passed, many Americans are hoping that they don't get selected for an IRS tax audit this year. While audits certainly aren't fun, the odds that your tax return will be chosen for an audit may be smaller than you think. Out of approximately 149.9 million individual tax returns filed for the 2016 tax year, the IRS audited 933,785. This translates to just 0.6% of all individual tax returns.

However, this audit rate can vary significantly depending on a few factors -- specifically, the type of return you filed and how much income you have. So let's take a closer look at the data to see how these variables can affect the likelihood of an audit.

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By type of return

As a general rule, the less complicated your tax situation, the lower the likelihood that you'll be audited.

For example, consider that non-business tax returns with no schedules C, E, or F, no Earned Income Tax Credit, and less than $200,000 in total income have an overall audit rate of about 0.2%. In other words, if you fall into this category -- and more than half of all tax returns do -- you have roughly one-third of the audit probability of the average individual tax return.

However, the audit probability can get significantly higher if you have rental income, business income, or other complications such as the Earned Income Tax Credit. In short, these areas have high potential for abuse, so the IRS likes to keep a closer eye on them. Here's a chart that shows what these things can do to your audit risk:

Description	Returns Filed	Returns Audited	Rate
Nonbusiness returns with Schedule E (rental income) and no EITC	15,818,718	112,792	0.7%
Business returns (Schedule C or F) without EITC	15,944,949	175,687	1.1%
Returns with EITC	27,858,140	381,269	1.4%

Data Source: 2017 IRS Data Book.

By income level

Another variable with a big impact on audit risk is the taxpayer's income. Before we get into the numbers, the simplified explanation is that taxpayers with incomes that could be considered "average" are less likely to be audited than those with income at the extremes -- either very low or very high.

With that in mind, here's a breakdown of the IRS's 2017 individual tax return audit rate by the size of adjusted gross income, or AGI.

Size of AGI	Percentage of Returns Audited
$0	2.55%
$1-$24,999	0.71%
$25,000-$49,999	0.49%
$50,000-$74,999	0.48%
$75,000-$99,999	0.45%
$100,000-$199,999	0.47%
$200,000-$499,999	0.70%
$500,000-$999,999	1.56%
$1,000,000-$4,999,999	3.52%
$5,000,000-$9,999,999	7.95%
$10,000,000 or more	14.52%

Data Source: 2017 IRS Data Book.

By audit type

It also is important to realize that not all tax audits are the same. Despite the common idea of IRS agents showing up at your door, the reality is that most IRS tax audits are "correspondence audits," which means that they're conducted entirely by mail.

In 2017, the IRS conducted 719,203 correspondence audits of individual tax returns, which is 77% of the total. And while more than 700,000 audits may sound like a lot, correspondence audits often can be quite simple -- such as requesting verification of certain deductions.

Only 23% of 2017 individual tax audits were done face-to-face, and these are generally reserved for situations that are quite complex (such as reviewing a business' books), or are simply impractical to complete by mail. For example, if you claim a deduction for a 1,000-square-foot home office, the IRS may want to actually see that such a home office actually exists and meets the IRS requirements.

The outcome of the average tax audit

So, what's the result of the average tax audit? The average correspondence audit results in a recommended additional tax of $6,014 per return, while the average field audit results in a massive $21,918 in additional recommended tax.

These numbers may sound enormous, but bear in mind that this isn't necessarily the amount that the average person ends up paying. And most of this doesn't result from random auditing. More often than not, the IRS chooses the returns to audit because of certain red flags.

It also is worth pointing out that as long as you're honest on your tax return, an audit doesn't necessarily need to be scary, nor will it necessarily cost you any money. As a personal example, my wife and I received an IRS letter last year in which they claimed that we were not entitled to the Lifetime Learning Credit that we had claimed for my wife's graduate school tuition. They sent us a bill for the proposed changes, but after I mailed in the necessary documentation to show that we indeed had paid qualifying tuition, the IRS agreed that our credit was legitimate.

Every year is different

As a final point, keep in mind that this is based on 2017 IRS data, and every year is slightly different, so it's likely that 2018's figures won't be exactly the same as those discussed here. However, there's no reason to believe that the general trends will change -- a low overall audit rate and a higher likelihood of an audit for businesses and high/low income individuals.

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