According to the GAO the audit rates for individual income tax returns from 2010 to 2019 went from 0.9 percent to .025 percent. Rates dropped even lower during Covid but this is getting ready to change.

With the hiring of a projected 87,000 new auditors and a government deficit due to Covid and a spending spree, due to one party having complete control of all three branches of the government, the government needs money and those in power think increasing audits will bring in much more that the cost of these additional auditors.

There are four reasons taxpayers are audited:


1. DIFF Score Audits

These audits are generated when the information on a taxpayer’s return has a large discrepancy from the average of all taxpayers with similar income. For example, a taxpayer’s charitable deductions are 30% of their income when the average for taxpayers earning the same amount is 2%. Or they are self-employed and never show any taxable profit when others in the same business have an average profit of 15%.

2. Matching Audits

These audits happen when the information shown on the taxpayer’s return does not match information received by the IRS from third parties. Items such as income from 1099s, W2s, 1098s, or other forms reported to the IRS by third parties. These audits often involve nothing more than an IRS notice CP 2000 asking for an explanation of the difference and proposing changes to the tax return resulting in additional taxes and penalties being due.

3. Random Audits

In these cases the computers at the IRS randomly choose returns for audit, so that the information obtained can be used to establish statistical norms and help refine the DIFF score formulas.

4. Referral Audits

These audits result from the IRS receiving information from third parties about underreporting and fraud. In many cases, the reporting parties may be looking to claim a reward or have an ax to grind. Ex-spouses, Ex-employees, and even competitors are all sources for these types of audits. It’s as simple as filing IRS Form 211. All reports filed do not result in a reward and are not always accurate, but they can result in a nightmare for the taxpayer that is the subject of the report even if no or little additional tax is due.

We expect to see more audits as the IRS brings all the new agents funded by Congress on board. We also expect to see an increase in audits of average taxpayers earning under $400,000, regardless of what we are hearing from the White House or Congress about going after millionaires, billionaires, and big business.