Chances of Being Audited by the IRS: Odds, Triggers, and Penalties

The chances of being audited by the IRS are low for most people: the agency examined about 0.40% of individual returns filed for tax years 2014 through 2022, or roughly four out of every thousand.¹ That average hides a wide spread. Your real odds depend on what you earn, whether you’re self-employed, which credits you claim, and how cleanly your return matches the income data the IRS already has from employers, banks, and brokerages.

Your Odds by Income

Income is the single biggest factor in whether the IRS looks twice. The pattern is U-shaped. Rates are elevated at the bottom of the income scale, lowest through the broad middle, and climb sharply at the top.

Under $25,000: audit rates run well above average, driven almost entirely by reviews of Earned Income Tax Credit claims. Correspondence audits of low-income EITC returns are cheap for the IRS to run, which makes them a disproportionate share of the total.²
$25,000 to $500,000: the quietest zone. Audit rates here have consistently been below the national average, often well under 0.5%.
$1 million to $5 million: 1.0% for tax year 2020.
$5 million to $10 million: 2.3%.
Over $10 million: 8.8% for tax year 2020, roughly 22 times the overall average.¹

Those high-income figures come from the most recent tax year that has fully cycled through the audit process. Newer years will likely show similar patterns, though the exact rates shift with IRS staffing and enforcement priorities.

What an IRS Audit Actually Looks Like

The IRS closed 505,514 audits in fiscal year 2024, with 444,014 of those involving individual returns.¹ Roughly three-quarters were correspondence audits, meaning the IRS sent a letter questioning one item on the return and asked for documentation. That’s it. No in-person meeting, no visit, no revenue agent going through your files.

Field audits are the intensive kind. A revenue agent reviews your full financial picture, sometimes at your home, business, or an IRS office. They’re reserved for complex returns and situations where the potential underpayment is large enough to justify the agent’s time. For most filers, if an audit ever happens, it will arrive as a letter about a specific line on the return.

What Triggers a Second Look

The IRS doesn’t pick returns out of a hat. Its Automated Underreporter system compares what you reported against W-2s, 1099s, and other information returns the agency already has on file.³ Forgot to report a 1099-NEC from freelance work? Skipped the interest on a savings account? The system catches the mismatch automatically. Those discrepancies typically produce a CP2000 notice, which isn’t technically an audit but is a proposed adjustment that can raise your tax bill.⁴

Beyond automated matching, the IRS uses a scoring system called the Discriminant Information Function that compares your return against statistical norms for filers with similar income. Returns that fall well outside those norms score higher and are more likely to be selected. Patterns that push the score up:

Deductions far above average for your income level. Claiming $50,000 in charitable donations on $100,000 of income will stand out.
Round numbers for large expenses. Reporting exactly $10,000 in travel or $5,000 in supplies reads as estimation, not record-keeping.
Repeated business losses on Schedule C, which invite questions about whether the activity is really a business.
Claiming 100% business use of a vehicle. Almost no one actually does this, and the IRS knows it.

Self-Employment Raises the Bar

If you file a Schedule C, your return draws more scrutiny than a straightforward W-2 return. Schedule C filers who report losses face estimated audit rates of 1% to 2%, several times the overall average. Self-employment income is largely self-reported, and decades of IRS compliance studies show that’s where the biggest gaps between owed and reported tax appear.

The home office deduction is a common flashpoint. The space you claim must be used exclusively and regularly for business. A guest bedroom that also holds your desk doesn’t qualify. Overstating square footage or claiming a room that doubles as personal living space is one of the fastest ways to draw a correspondence audit.

Gig and platform work carry their own risk. Income reported to you on a 1099-K or 1099-NEC is already known to the IRS before you file. Failing to report it produces an automatic mismatch. Even earnings that fall below a platform’s reporting threshold are still taxable and still belong on your return.

The Hobby Loss Rule

If your side business loses money more often than it makes it, the IRS may reclassify it as a hobby and disallow your deductions. An activity is presumed to be a for-profit business if it turns a profit in at least three of the last five tax years.⁵ Horse breeding and racing use two profitable years out of seven. Fail the test and you can still argue you’re running a real business, but the burden shifts to you.

Credits That Draw Scrutiny

Earned Income Tax Credit

The EITC is one of the most frequently audited items on any tax return. The IRS closed nearly 260,000 EITC audits in fiscal year 2022 alone.⁶ The eligibility rules are genuinely complicated, involving income thresholds, filing status, and which qualifying children live with you, and the improper payment rate keeps the credit a permanent enforcement priority. These audits are almost always handled by mail, with a letter asking you to prove your eligibility.

Employee Retention Credit

The ERC has become a major enforcement problem after a wave of questionable claims driven by aggressive promoters. The IRS imposed a moratorium on processing new ERC claims starting September 14, 2023, and the filing window officially closed on April 15, 2025. As of early April 2025, the agency had issued letters partially or fully disallowing approximately 84,000 claims, with over 597,000 still in inventory.⁷ If a disallowance takes more than two years to resolve, the IRS may be legally barred from issuing a refund even if it later agrees the claim was valid.

Digital Assets and Crypto

Cryptocurrency, stablecoins, and NFTs are treated as property for tax purposes, and enforcement is tightening. Every federal tax return now includes a yes-or-no question about whether you received, sold, exchanged, or otherwise disposed of digital assets during the year. The question appears on Forms 1040, 1040-SR, 1065, 1120, and others.⁸ Answering “no” when you had reportable transactions creates exactly the kind of clear discrepancy the IRS looks for.

Starting in 2025, brokers must report gross proceeds from digital asset transactions to the IRS. Beginning in 2026, brokers must also report cost basis on certain transactions.⁹ Once that reporting is in place, the IRS will have third-party data to match against what taxpayers report, just as it does for stock sales and wages.

How Long the IRS Has to Come Back

The IRS doesn’t have forever. In most cases, the statute of limitations for assessing additional tax is three years from the date you filed or the date the return was due, whichever is later.¹⁰ Once that closes, the IRS generally cannot assess more tax for that year.

The important exceptions:

Substantial income omission. Leave out more than 25% of gross income and the IRS gets six years.¹⁰
Fraud. A false or fraudulent return filed with intent to evade tax has no time limit.
Failure to file. If you never filed, the clock never started.

The statute can also be paused if the IRS issues a notice of deficiency or if you file for bankruptcy, and both sides can agree in writing to extend the deadline.

If You Get an Audit Notice

A notice doesn’t mean you owe anything. It means the IRS wants to verify something on your return. You have formal protections throughout the process under the Taxpayer Bill of Rights.¹¹ The most relevant during an audit: the right to be told what the IRS is questioning and how it proposes to change your return; the right to respond with documentation and be heard; the right to appeal to the IRS Independent Office of Appeals, which is separate from the examination division; and the right to have an attorney, CPA, or enrolled agent represent you at any stage.

If you and the examiner can’t agree, the IRS sends a 30-day letter giving you 30 days to request an Appeals conference. If Appeals doesn’t resolve things, or you skip it, the IRS issues a notice of deficiency, sometimes called a 90-day letter. You then have 90 days (150 if you’re outside the United States) to file a petition with the U.S. Tax Court. Miss that window and the tax is assessed automatically, and you lose the right to challenge it in Tax Court.¹²

Getting Help

You don’t have to face an audit alone. Form 2848 (Power of Attorney) lets you authorize an attorney, CPA, enrolled agent, or certain other professionals to represent you before the IRS, including in your absence.¹³ For a simple correspondence audit involving one questioned item, you can usually handle it by gathering receipts and mailing them in. For a field audit or a dispute involving real money, professional help is worth the cost. If you can’t afford representation, Low Income Taxpayer Clinics offer free or low-cost help and exist in every state.

Penalties If the Audit Finds a Problem

If the IRS determines you underreported your tax, you owe the additional tax plus interest. On top of that, the accuracy-related penalty is 20% of the underpayment when the error came from negligence, a substantial understatement of income, or a misstatement of value.¹⁴ If you owed an extra $10,000, the penalty alone would be $2,000.

The penalty can be avoided by showing reasonable cause and good faith. Relying on competent professional advice, keeping thorough records, and making a genuine effort to report accurately all work in your favor. Claiming you didn’t know the law applied, or that a preparer filled out the return without your review, does not. You’re responsible for what’s on the return no matter who prepared it.

What IRS Staffing Changes Mean for Your Odds

The Inflation Reduction Act originally gave the IRS $78.9 billion in mandatory funding across a decade, with $45.6 billion earmarked for enforcement aimed at high-income noncompliance and complex corporate structures.¹⁵ Treasury Secretary Yellen directed in August 2022 that the new resources would not be used to raise audit rates on households earning under $400,000.¹⁶

Much of that funding has since been clawed back. Combined rescissions have left roughly $37.6 billion of the original amount in place as of March 2025.¹⁷ By the end of 2025, the IRS had lost approximately 27,600 employees, including more than 3,600 revenue agents, roughly 31% of the auditing staff who handle complex high-income and business examinations.

For ordinary filers, audit odds were already low and are unlikely to rise. The enforcement surge that was supposed to target wealthy noncompliance has been cut short, so the numbers at the top end of the income scale may not stay at the levels the IRA-funded initiatives were built to reach. Automated matching against W-2s, 1099s, and soon crypto broker reports, though, doesn’t need staff to run. That side of enforcement is not going anywhere.

1
Internal Revenue Service. Compliance Presence
2
U.S. GAO. Tax Compliance: Trends of IRS Audit Rates and Results for Individual Taxpayers by Income
3
Internal Revenue Service. IMF Automated Underreporter Program
4
Internal Revenue Service. Topic No. 652, Notice of Underreported Income – CP2000
5
Office of the Law Revision Counsel. 26 U.S. Code 183 – Activities Not Engaged in for Profit
6
Taxpayer Advocate Service. EITC Audits: What You Need to Know
7
Taxpayer Advocate Service. The ERC Claim Period Has Closed
8
Internal Revenue Service. Digital Assets
9
Internal Revenue Service. Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets
10
Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection
11
Internal Revenue Service. Taxpayer Bill of Rights
12
Internal Revenue Service. Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund
13
Internal Revenue Service. Instructions for Form 2848
14
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
15
Congressional Research Service. Internal Revenue Service Appropriations, FY2024
16
U.S. Department of the Treasury. Secretary of the Treasury Janet L. Yellen Sends Letter to IRS Commissioner
17
Treasury Inspector General for Tax Administration. The IRS’s Inflation Reduction Act Spending Through March 31, 2025