The odds of an IRS tax audit, according to income
Filing taxes can be stressful, particularly for small business owners and self-employed individuals. Yet nothing compares to the anxiety and hassle often induced from an IRS audit.
Fortunately, the IRS audits relatively few taxpayers. Your particular odds of getting audited depend on your income, the type of income you report, and, of course, any potential red flags. If you earned wages which were reported on a W-2, do not own a home, and filed a 1040EZ, it is extremely unlikely you will be audited; less than 1 percent of such taxpayers do.
Likelihood of an audit increases with income
In addition, higher your income, the more likely you are to get an audit. The reason is straightforward: the IRS nets a greater return on audits involving larger amounts of money. On average, a taxpayer earning over $10,000,000 per year is a full 10 times more likely than the average taxpayer to be audited.
According to IRS data from 2013, the odds of getting an audit according to yearly income are:
- Over $10 million: 19 percent
- $5 to $10 Million: 12 percent
- $1 to $5 million: 7 percent
- $500,000 to $1 million: 4 percent
- $200,000 to $500,000: 2 percent
- Under $200,000: less than 1 percent
- No Adjusted Gross Income: 6 percent
It is hard to fault the IRS’ logic. Greater income means more potential hidden income, while taxpayers with a net loss or no taxable income may be claiming credits for which they do not qualify.
Other red flags
Of course, regardless of your income, you may be audited if certain red flags show up on your return. Large unsubstantiated charitable donations are a red flag, as is income reported on a Schedule C. But keep in mind this does not mean you should not claim credits to which you are entitled for fear of being audited. It is simply important to ensure you are filing accurate and justifiable tax returns.
Also, it helps to remember than an IRS audit does not mean you have not paid your fair share of taxes. It simply means the IRS is giving you a second look.