The IRS Is Looking to Ramp Up Audits. Should You Be Worried?

Audit activity could pick up. But not everyone will be equally affected.

There's a reason just a small percentage of tax returns gets audited every year. It's not that the IRS doesn't want to go after taxpayers for the money it's owed. It's that the agency has, for years, been sorely underfunded, and that's limited its ability to conduct audits.

But things could change thanks to an influx of funding. And while that's great news for the IRS, it may not be the news taxpayers want to hear.

But should you start panicking that your chances of getting audited are about to increase? Not necessarily.

The IRS is leaving certain taxpayers alone

The Senate recently approved close to $80 billion in IRS funding, more than half of which has been earmarked for enforcement purposes -- meaning, making sure tax-filers are paying what they're supposed to. Between 2015 and 2019, IRS audit rates dropped by 44%. And that's largely due to a lack of funding.

Now, the IRS may have the ability to increase audit activity. But that doesn't mean every single tax-filer has to worry.

Historically, IRS audit rates have been highest among filers earning a lot of money or very little money. Middle, moderate, and even moderately high earners tend to have lower audit rates.

Once the IRS gets more funding, the fear is that filers who are commonly spared an audit might end up getting flagged. But IRS Commissioner Charles Rettig insists that an uptick in resources won't increase audit activity for small businesses or middle-income Americans. So that's good news.

Of course, this isn't to say that middle earners are completely in the clear from an audit perspective. A self-employed writer earning $75,000 a year might get audited if they claim $40,000 worth of business deductions, as most independent contractors can't afford to spend half of their income on business expenses when their wages aren't that high to begin with.

Similarly, a married couple earning a joint $60,000 income may have their tax return further examined if they claim $10,000 a year of mortgage interest. At that income level, a mortgage deduction that high just seems off. But for the most part, added funding may not impact middle earners all that much, the same way they've historically been less likely to end up getting audited.

Filers can lower their audit risk

The best way to avoid an audit at any income level? Be honest. Don't claim bogus deductions, don't fail to report income, and don't lie about business expenses you didn't really incur.

Of course, it's not unheard of for a tax-filer to be completely honest, claim reasonable deductions, and still end up on the IRS audit list nonetheless. But tax-filers who keep solid records to support their claims can often emerge from those audit situations unscathed, which is why it's so important to maintain solid tax records at all times.

The IRS typically gets three years to audit an old tax return, so filers shouldn't simply toss out their tax documents once their returns are submitted. Instead, all documents should be stored securely for at least three years. The IRS can go back further if it spots a "substantial" error, but it rarely goes back more than six years.