The Internal Revenue Service (IRS) remains a vigilant overseer of tax compliance, yet audits are not as frequent as many fear. In fiscal year 2023, only 0.44% of individual returns underwent examination. The IRS primarily conducts these audits through correspondence, accounting for over 77% of cases. Taxpayers with comprehensive substantiation, such as receipts and records, can generally face audits with confidence. The agency typically identifies irregularities through "information returns," which are tax forms submitted by employers and financial institutions. Discrepancies between these forms and taxpayer returns may trigger audits.
Higher earners find themselves under increased scrutiny from the IRS. The agency is particularly attentive to income discrepancies and significant tax breaks relative to a taxpayer's income. For instance, charitable deductions comprising 30% to 50% of one's adjusted gross income can raise red flags, prompting a closer look. Furthermore, taxpayers claiming the Earned Income Tax Credit (EITC) experience a notably higher audit rate—5.5 times greater than other filers—often due to improper payment issues.
Filers should not panic if flagged for an audit; preparation is key. Mark Baran, a tax expert, advises that preparedness can deter further examination:
"The IRS knows when somebody is prepared and they will move on," – Mark Baran
The IRS employs correspondence audits primarily for minor errors or unintentional omissions. These audits, conducted via mail, often focus on previous tax years, ranging from 2013 to 2021. Auditing efforts aim to ensure accuracy and compliance, as outlined in the IRS Data Book detailing the scope of individual returns examined.
However, taxpayers should avoid risky financial maneuvers that might attract unwarranted attention. Baran cautions against taking chances that could heighten audit risks:
"You're really playing the audit lottery and increasing your risk," – Mark Baran