The IRS audited approximately 0.4% of individual income tax returns in fiscal year 2024 -- less than 1 in 200. The overall risk is low, but it is not evenly distributed. Certain income levels, deduction patterns, filing characteristics, and income types significantly increase the probability of a closer look. Understanding what triggers scrutiny lets you prepare adequate documentation and file with confidence.
How the IRS Selects Returns for Audit
Most audits are not random. The IRS uses several overlapping selection methods:
- DIF score (Discriminant Information Function): Every return receives a computer-generated score comparing your deductions, income, and credits against statistical norms for your income level. Returns with unusually high scores are flagged for human review. The IRS does not publish DIF formulas, but the patterns that drive high scores are well understood from audit data.
- Document matching (CP2000 program): The IRS electronically matches every piece of income on your return against 1099s, W-2s, and other information returns filed by payers. A mismatch generates an automatic CP2000 notice -- not a full audit, but it requires a response and can result in additional tax, penalties, and interest.
- Related examinations: If a business, partnership, or individual who paid you is audited, the IRS may examine your return as a related party. S-corporation shareholders and business partners are sometimes selected this way.
- Informant claims: The IRS accepts tips through its whistleblower program. Unreported cash income from a business is a common subject of informant claims.
Common Audit Triggers
Large Deductions Relative to Income
The IRS knows what charitable contributions, business expenses, and miscellaneous deductions look like for a given income level. A $40,000 charitable deduction on a $60,000 return will score high on the DIF. That does not mean you should not claim legitimate deductions -- it means you should document them thoroughly. Keep written acknowledgments from charities for contributions over $250, appraisals for non-cash gifts over $5,000, and receipts for all claimed expenses.
Schedule C Losses -- Especially Repeated Ones
Self-employment income on Schedule C draws disproportionate audit attention because it is self-reported and historically shows higher rates of underreporting. Businesses showing net losses year after year may be reclassified as hobbies, which eliminates the ability to deduct losses against other income. The IRS presumes a profit motive if a business shows a profit in at least 3 of the last 5 years. If you consistently lose money on an activity, document your business plan, marketing efforts, and steps taken to improve profitability.
Home Office Deduction
Claiming a home office deduction is legitimate for genuine home-based businesses, but the IRS requires that the space be used regularly and exclusively for business. A desk in a corner of your living room does not qualify. A dedicated room used only for business does. Document the square footage of the office and the total home square footage -- the deduction is proportional. Keep records showing the space is not used for personal activities.
Cryptocurrency and Digital Assets
The IRS now requires all taxpayers to answer a digital asset question on the front page of Form 1040, and cryptocurrency exchanges are required to file Form 1099-DA with the IRS. Underreporting crypto gains is a specific enforcement priority. Every taxable event -- a sale, a trade of one crypto for another, or using crypto to purchase goods -- must be reported. The IRS has sent thousands of letters to taxpayers identified through exchange data as having unreported crypto transactions.
Mismatched Information Returns
The most common cause of IRS notices: a 1099 is filed with the IRS but not reported on your return. This includes 1099-INT (interest), 1099-DIV (dividends), 1099-B (brokerage sales), 1099-NEC (contractor income), and 1099-K (payment platform income). Always cross-check every 1099 you received against your return before filing.
High Cash Income Businesses
Restaurants, car washes, hair salons, and other businesses with high cash transaction volumes are historically over-represented in audits. The IRS uses industry-specific norms for gross profit margins -- if your reported margins are significantly below the industry average, it suggests unreported cash income.
Earned Income Tax Credit (EITC)
EITC claims are audited at higher rates than most other returns because the credit has a historically high improper payment rate. Common EITC audit issues include claiming a child who does not meet the qualifying child rules, overstating self-employment income to maximize the credit, and understating income to stay below phase-out thresholds. If you claim the EITC, keep documentation of the qualifying child's residency and your income sources.
Foreign Financial Accounts and Assets
U.S. taxpayers with foreign bank accounts or financial assets above certain thresholds must file FBAR (FinCEN Form 114) and Form 8938. Failure to file these forms carries severe penalties independent of any tax due. The IRS has significantly expanded foreign account enforcement in recent years through international data-sharing agreements.
What to Do If You Are Audited
Most audits are correspondence audits -- the IRS sends a letter requesting documentation for a specific item, and you respond by mail. If you receive an audit notice:
- Read it carefully to understand exactly what is being questioned
- Gather the specific documentation requested -- receipts, bank statements, mileage logs, written acknowledgments
- Respond by the deadline stated in the letter; call the number on the notice if you need an extension
- Consider consulting a tax professional (CPA, enrolled agent, or tax attorney) if the amount at issue is significant or the audit expands beyond the initial items
How Long to Keep Records
The standard IRS statute of limitations for auditing a return is 3 years from the filing date. Keep records for at least this long. The statute extends to 6 years if you substantially understated income (omitted more than 25% of gross income). There is no statute of limitations for fraudulent returns or returns that were never filed.
Source
IRS Data Book FY2024; IRS Publication 556 (Examination of Returns, Appeal Rights, and Claims for Refund); IRS Publication 552 (Recordkeeping for Individuals).
The Difference Between an Audit and a CP2000 Notice
Many taxpayers receive IRS correspondence and assume they are being audited. In most cases they are not. The most common IRS letters are CP2000 notices, which are automatically generated when income reported on your return does not match what payers reported to the IRS. A CP2000 is a proposed adjustment, not an audit finding. You can respond by agreeing to the adjustment, disagreeing and providing documentation, or some combination. A full correspondence audit is a separate process that examines your deductions and credits in detail and involves specific document requests.
If you receive any IRS notice, read the letter carefully to understand exactly what is being questioned before responding. Most notices have a response deadline and a toll-free number. Never ignore IRS correspondence -- failing to respond converts a proposed adjustment into an assessed liability.
Audit Rates by Income Level
The IRS historically audited high-income returns at higher rates. Returns showing income over $1 million faced audit rates of around 2-3% in recent years, compared to less than 0.5% for returns in the $75,000-$100,000 range. However, the IRS has also consistently audited low-income EITC claimants at elevated rates, reflecting the high improper payment rate for that credit. The IRS has stated an intention to increase audit rates for high earners and large partnerships following additional funding under the Inflation Reduction Act, though actual audit rate changes take years to implement and measure.