The IRS is ramping up its audits in 2025, and if you’re not prepared, you could be one of the unlucky ones caught in their crosshairs. With stricter guidelines and new red flags, the odds of being audited are rising, especially if you’re self-employed or fall into higher income brackets.
The scariest part? Many taxpayers don’t even realise they’re at risk until it’s too late.
We’re seeing trends that suggest the IRS is going after certain groups more aggressively than ever before. ERC claims certain deductions and common reporting errors are on their radar. If you don’t know what to expect, you could be facing hefty penalties or even legal action. So, how do you make sure you’re not one of the targets? Understanding what’s changed and how to prepare is your first line of defence.
In this blog, I’m going to break down exactly what you can expect in 2025, the high-risk categories that often face the most scrutiny, and the steps you need to take now to avoid being a target.
With so much at stake, it’s not about “if” you’ll get audited—it’s about being prepared if you do.
Understanding IRS Audit Rates
What the IRS is planning?
The IRS plans to triple audit rates for large corporations and multimillionaires in the next few years. The expected audit rate for corporations with assets exceeding $250 million will jump from 8.8% in 2019 to a staggering 22.6% by 2026. This increase is primarily fueled by the $60 billion allocated from the Inflation Reduction Act to boost IRS spending and hiring.
In fiscal 2024 alone, the IRS is slated to spend $7.25 billion, a significant increase from $3.4 billion in 2023. By fiscal 2025, that figure will rise to $9.3 billion. This investment isn’t just about numbers; it’s about revitalizing an agency that has struggled with outdated systems and insufficient staff. The goal is clear: close the $7 trillion tax gap between what’s owed and what’s collected.
Expected Audit Rates in 2025
First off, expect to see a shift in audit rates this coming year. The IRS is targeting higher audit rates, especially among wealthy individuals and larger corporations. The goal? To ensure compliance and close the tax gap.
In practical terms, this means that if you’re earning more than $400,000, you might find yourself under the IRS microscope more than in previous years. The IRS plans to focus its resources on auditing higher-income taxpayers, but don’t think you’re off the hook if you’re in a lower bracket. They are also increasing audits for small businesses and freelancers.
Why?
Because those are often areas where misreporting can happen. It’s vital to keep your financial records in order and to be prepared for the possibility of an audit.
New Trends and Changes in IRS Audits
The IRS is not just increasing numbers; they’re also changing the way they approach audits. They’ve implemented new technology and data analytics to identify potential red flags. This means audits could be initiated based on patterns and discrepancies in your filings that the IRS flags as concerning.
Moreover, the IRS has committed to transparency in its audit processes. Taxpayers will now receive more detailed explanations about why they are being audited. This is good news because it can help you understand the IRS’s perspective and prepare your case more effectively.
How to Prepare for an IRS Audit
Preparation is your best defense against an audit. Here are some tips to help you get ready:
- Organize Your Records: Keep all your financial documents well-organized. This includes W-2s, 1099s, receipts, and bank statements. Make sure everything is easy to find.
- Review Your Returns: Before filing, double-check your tax returns for accuracy. Mistakes can trigger audits.
- Stay Informed: Keep up with changes in tax laws and IRS regulations. Understanding what’s new can help you navigate your filings.
- Consult a Professional: If you feel overwhelmed, it’s wise to consult with a tax professional. They can provide tailored advice and help you strategize for the coming year.
- Be Honest: If you’re unsure about something, it’s better to be upfront than to risk an audit based on misreporting.
By knowing what to expect and preparing accordingly, you can mitigate the stress and potential consequences of an IRS audit. Remember, audits can happen to anyone, but being prepared can make a world of difference.
IRS Audit Rates by Income Level
Now, let’s break down how these audit rates vary by income level. Understanding this breakdown is crucial for grasping how it impacts you. The IRS has different audit rates for various income brackets, and this can significantly affect your likelihood of being audited.
Breakdown of Audit Rates by Income Bracket
- Under $25,000: This bracket sees a relatively low audit rate. The focus here is not on small earners. However, be cautious with any discrepancies.
- $25,000 – $100,000: Audit rates remain low but are slightly higher than the lowest bracket. If you have significant deductions or unusual income sources, expect scrutiny.
- $100,000 – $400,000: The audit rates in this range are noticeably higher. If you’re in this bracket, ensure your paperwork is immaculate. The IRS pays attention to potential red flags here.
- Above $400,000: Buckle up. Audit rates soar in this category. High-income earners are prime targets for the IRS. This includes those making millions, as well as high earners in professions such as finance, law, and medicine.
- Corporations and Partnerships: The IRS is increasingly focused on larger entities, especially partnerships and S-Corps. The complexity of their financial structures often hides significant tax liabilities, making them prime candidates for audits.
By understanding these audit rates, you can better prepare and protect yourself against potential IRS inquiries.
Now we’ll explore the audit trends from previous years. Understanding these patterns will give you insights into what the IRS is focusing on and how you can prepare for your tax filing this year and beyond.
Audit Trends from Previous Years
a. Chances of Being Audited by IRS in 2023
Let’s take a look back at 2023 to understand where we might be headed in 2025. Last year, the chances of getting audited were extremely low. Only about 0.2% of all tax returns were audited in 2023. That means 1 in 500 returns got flagged.
But here’s the twist: the IRS didn’t target everyone equally. Higher earners, especially those making over $10 million a year, had a 2.4% chance of being audited. That’s over ten times higher than the general population.
It’s not just the ultra-wealthy who have to worry. Lower-income taxpayers claiming the Earned Income Tax Credit (EITC) were also more likely to be audited. Surprising, right? You’d think high earners would dominate the audit scene. However, around 8 out of 10 audited EITC returns had mistakes, either in income reporting or claiming dependents.
Now, why does this matter?
Because these trends from 2023 give us insight into what could unfold in 2025. The IRS isn’t just out to audit anyone—they’re laser-focused on where they can recover the most money. And while audits have historically declined due to staffing shortages, this could change. With the $80 billion boost in funding from the Inflation Reduction Act, the IRS has been given more muscle to audit high-income earners and corporate tax dodgers.
What 2023 Teaches Us About 2025
The trend in 2023 tells us a lot. The audit rate for middle-income taxpayers was incredibly low, under 1%. But that doesn’t mean you should let your guard down. The IRS will likely continue to focus on high-income individuals and businesses. If you fall into those categories, it’s a good idea to make sure all your ducks are in a row. Avoiding mistakes or “fudging” numbers is the best way to dodge an audit.
Even for lower earners, specifically those claiming the EITC, the chances of an audit still exist. Reporting errors and mismatched information often trigger these audits. So, be careful, even if you think your income is too low to attract attention.
Key Takeaways from 2023
- High-income earners: Be prepared. You were more likely to be audited in 2023, and this trend may continue.
- EITC filers: Make sure all your details are accurate. Errors in dependents or income could flag your return.
- Middle-income earners: Your chances were low in 2023, and they’ll likely stay low. But always file carefully and honestly.
b. Chances of Being Audited by IRS in 2024
2024 brought some significant changes to the audit landscape, mainly due to the additional funding the IRS received from the Inflation Reduction Act. With $80 billion funnelled into enforcement, it was clear that audits were going to be a bigger focus. But before you start panicking, let’s break down who really needed to be concerned.
For most taxpayers, the audit risk remained very low. If you’re earning a typical wage, you likely had less than a 1% chance of being audited, just like in previous years. The IRS doesn’t have the capacity to audit everyone, even with more resources. Instead, they’re focusing on the high earners—those making over $400,000, large corporations, and anyone they suspect of significant underreporting.
But what’s different in 2024 is that the IRS specifically stated they were prioritizing fairness in tax compliance. This means they targeted high-income individuals, partnerships, and promoters more aggressively than before.
So, if you were making $10 million or more, your audit chances were higher—probably closer to 2.5%. If you were running a business with complex deductions or operating as a large corporation, you were also on their radar.
What 2024 Audit Trends Mean for 2025
In 2024, we saw the IRS continue its trend of focusing on those who are likely to yield the most revenue.
What this means for 2025 is simple: if you’re a high-income individual or running a large business, expect audits to remain a priority. The IRS is still going after those who they believe are more likely to have compliance issues.
For the average taxpayer, though, the story remained largely the same. The audit risk in 2024 was still extremely low, under 1%. Middle-income earners weren’t a priority, and as long as you reported your income accurately and didn’t claim any suspicious deductions, you probably had nothing to worry about.
Key Audit Focuses in 2024
- High-income earners ($400K+): These individuals faced increased scrutiny in 2024. The IRS wanted to crack down on underreporting and aggressive tax strategies.
- Large corporations: Businesses with complex financials or those suspected of tax avoidance were more likely to get audited.
- EITC claimants: Lower-income earners claiming the Earned Income Tax Credit still had a slightly higher audit risk due to common errors in reporting dependents or income.
Steps to Reduce Your Audit Risk
To avoid any surprises from the IRS, the key is simple: accuracy. Make sure you’re reporting everything properly, from income to deductions. Even small mistakes can trigger an audit, especially when your reported numbers don’t match up with what the IRS already knows (like 1099s from banks or employers).
If you’re in a higher income bracket, consider working with a tax professional to ensure everything is in line. The IRS focused heavily on wealthy individuals and large corporations in 2024, so if that’s you, it’s worth double-checking your return.
Bottom Line for 2024
The IRS wasn’t out to get everyone in 2024. But if you were a high earner or running a large business, your audit risk was noticeably higher. Still, for most people, the odds of being audited were slim, and staying honest and accurate in your tax filings was the best way to stay off the IRS radar. As we head into 2025, expect similar trends, with the IRS continuing to target areas where they believe they can recover the most revenue.
High-Risk Categories for Audits: Self-Employed Audit Red Flags
As a tax professional, I’ve seen it all. Self-employed individuals often face unique challenges during tax season. Understanding the red flags that may attract IRS scrutiny is essential. Here are some common issues that could land you in hot water.
1. Unusually High Deductions
If you’re self-employed and claim significant deductions relative to your income, expect questions. The IRS pays attention to discrepancies. Be ready to justify those expenses.
2. Cash Transactions
The IRS loves tracking cash transactions. If your income is predominantly cash-based, you’re on their radar. Make sure to keep meticulous records of all cash sales.
3. Inconsistent Income Reporting
Do you report wildly fluctuating income year after year? This inconsistency raises eyebrows. The IRS will look for patterns. Provide documentation to show legitimate business growth or downturns.
4. Excessive Business Expenses
Claiming excessive business expenses can be a red flag. If you write off personal expenses as business-related, you could face an audit. Always separate personal and business finances.
5. Home Office Deduction
Claiming a home office deduction? Be cautious.
The IRS scrutinizes these claims closely. Ensure your home office meets the requirements. Keep records of your expenses.
6. Misclassifying Employees
If you hire workers, misclassifying them as independent contractors can lead to trouble. The IRS looks for proper classification. Make sure your contracts are clear and compliant.
7. Prior Audit History
Have you been audited before? This can increase your chances of a future audit. The IRS may take a closer look at your returns if you have a history of discrepancies.
8. Failing to Report All Income
This is a surefire way to attract IRS attention. Always report every dollar you earn. The IRS can match your reported income against third-party information.
Who Gets Audited by IRS the Most
So, who gets audited the most? Understanding the groups at higher risk can help you prepare. Here’s a closer look at these categories.
1. High-Income Earners
It’s no surprise that high-income earners are more likely to face audits. If you report over $200,000 in income, your chances of an audit increase significantly. The IRS targets this group for potential discrepancies.
2. Small Business Owners
Small business owners often find themselves in the crosshairs. The IRS is vigilant about ensuring small businesses comply with tax regulations. If you own a business, keep your records transparent.
3. Real Estate Professionals
Real estate professionals, especially those with multiple properties, are under scrutiny. The IRS wants to ensure they aren’t overstating losses or deductions. Document your transactions thoroughly.
4. Those Claiming Earned Income Tax Credit (EITC)
Claiming the EITC? You’re more likely to be audited. This credit often attracts IRS attention. Ensure you meet all requirements and keep supporting documents handy.
5. Self-Employed Individuals
As previously discussed, self-employed individuals are frequent targets. The unique nature of self-employment can raise flags. Keep your documentation in order to avoid scrutiny.
6. People with Offshore Accounts
The IRS is keen on identifying unreported income from foreign assets. If you have overseas investments, report them accurately.
7. Frequent Amending of Returns
Do you frequently amend your returns? This could signal a lack of accuracy in your filings. The IRS may question your reporting habits. Ensure your initial return is as accurate as possible.
8. Claiming Large Charitable Deductions
Claiming substantial charitable deductions can lead to increased scrutiny. The IRS will look closely at your records. Keep receipts and documentation for every donation.
10 IRS Red Flags: What Are Your Chances of Being Audited?
Navigating the tax landscape can be challenging, especially with the looming fear of an audit. While the IRS audit rate is relatively low, certain behaviours can significantly increase your chances of being flagged for further review. Understanding these red flags can help you stay compliant and avoid unnecessary scrutiny. Here’s a detailed list of ten red flags that may increase your likelihood of an audit, along with tips on how to avoid them.
1. Failing to Report All Taxable Income
The IRS receives copies of all your 1099s and W-2s, making it crucial to report all income on your tax return. When there’s a mismatch between your reported income and the income documented by the IRS, it raises a red flag. To avoid this issue:
- Ensure all income sources are reported on your Form 1040, even if you don’t receive a form (e.g., income from freelance work or side gigs).
- If you notice incorrect income reported on a 1099, request the issuer to correct it immediately.
2. Making a Lot of Money
Higher income levels often correlate with increased audit rates, especially for business income. The IRS has dedicated resources to auditing high-net-worth individuals and entities. While the agency claims that taxpayers earning under $400,000 won’t see increased audit rates, it’s essential to stay informed. To minimize your audit risk:
- Maintain accurate records and documentation for all reported income.
- If your income is significant, consider consulting a tax professional to ensure compliance.
3. Non-Filers
The IRS has made it a priority to target high-income non-filers, particularly those with incomes exceeding $100,000. If you’re in this category, it’s critical to file your returns. Failure to comply can lead to severe consequences, including levies or even criminal charges. To avoid being flagged:
- File your tax returns on time, even if you can’t pay the full amount owed.
- Consider setting up a payment plan if you owe taxes but can’t pay in full.
4. Taking Higher-Than-Average Deductions, Losses, or Credits
Claiming excessive deductions, especially when disproportionate to your income, can trigger an audit. This includes significant losses from investments or business operations. To mitigate risk:
- Document all deductions thoroughly and ensure they are legitimate and reasonable.
- Consult a tax advisor if you plan to take substantial deductions that may raise eyebrows.
5. Taking Large Charitable Deductions
While charitable donations are commendable, claiming excessive deductions relative to your income can attract attention. Ensure that:
- Your charitable contributions are reasonable for your income level.
- You obtain appraisals for valuable property donations and file Form 8283 for noncash donations over $500.
6. Running a Business
Self-employed individuals face a higher audit risk, particularly those reporting significant losses or excessive deductions on Schedule C. To reduce audit chances:
- Report all income accurately and maintain detailed records of business expenses.
- Be cautious about claiming 100% business use of a vehicle; keep thorough mileage logs to support your claims.
7. Writing Off a Hobby Loss
Claiming losses from activities that resemble hobbies can raise red flags, especially if they offset other income. To avoid being categorized as a hobby:
- Ensure you have a business-like approach to your activities and can prove an expectation of profitability.
- Maintain records that demonstrate your efforts to make a profit, especially if your activity generates losses consistently.
8. Failing to Report Certain Professional Earnings as Self-Employment Income
Limited partners and LLC members who fail to report self-employment tax may attract IRS scrutiny. To avoid issues:
- If you actively participate in a business, ensure you’re paying the necessary self-employment tax.
- Consult a tax professional to understand your tax obligations, especially in professional service sectors.
9. Claiming Rental Losses
Claiming large rental losses can trigger an audit, particularly if you don’t meet the passive activity loss rules. To stay compliant:
- Ensure you understand the passive loss rules and make proper claims if eligible.
- Document your participation in rental activities if claiming the $25,000 loss deduction.
10. Claiming the American Opportunity Tax Credit (AOTC)
The AOTC is a valuable tax credit, but the IRS is intensifying scrutiny over its claims. Common pitfalls include taking credit for more than four years for the same student or failing to include the school’s taxpayer ID on Form 8863. To avoid issues:
- Ensure you meet the eligibility criteria and claim the credit only for qualified expenses.
- Maintain proper documentation, such as Form 1098-T, and avoid claiming multiple credits for the same expenses.
Special IRS Focus Areas
a. Increased IRS Audits Focused on ERC Claims: What to Know and How to Prepare
. As a tax professional, I understand the confusion surrounding ERC claims and the looming threat of increased IRS audits. The IRS has ramped up its focus on ERC claims, and it’s essential for you to prepare effectively.
Why is the ERC Getting So Much Attention?
The ERC was designed to support businesses during the COVID-19 pandemic, but it has attracted a flood of questionable claims. Many taxpayers relied on inadequate advice to determine their eligibility, resulting in a staggering number of potentially invalid claims. As a result, even taxpayers who diligently assessed their eligibility are facing increased scrutiny.
It’s crucial to recognize that the ERC can be extremely lucrative, with small employers potentially claiming credits worth millions. However, the lack of comprehensive IRS guidance on eligibility has opened the door for an array of ERC evaluation specialists who may not have your best interests in mind. This has further complicated the audit defense for many taxpayers.
IRS Warnings and Updates
The IRS has issued multiple warnings about ERC misuse, categorizing the ERC as part of its “Dirty Dozen” tax schemes. Despite these warnings, the volume of improper claims continues to rise. To combat this, the IRS has halted processing new ERC claims until further notice. If you filed ERC claims in 2023, expect a more rigorous review than in previous years.
The IRS is also introducing amnesty opportunities for taxpayers who filed improper claims. If you filed but have yet to cash your refund check, there’s a claim withdrawal program available. This aims to assist those misled by promoters of the credit, helping them avoid harsh penalties.
What Should You Do If You’ve Already Filed an ERC Claim?
1. Reevaluate Your Eligibility
If you filed an ERC claim, it’s time to reevaluate your eligibility. Many taxpayers misunderstood the requirements or received faulty advice. The IRS has released updates that clarify eligibility, but this information can still be subjective. Remember, receiving a refund check does not shield you from an audit.
2. Verify Your Credit Calculation
Double-check your ERC credit calculation. The rules have evolved, allowing you to claim the ERC even if you received a forgiven Paycheck Protection Program (PPP) loan, but not on the same wages. Common pitfalls include improperly calculating your employer aggregated group and assessing declines in gross receipts.
3. Consider M&A Planning
If you’re planning a merger or acquisition (M&A), assess your ERC exposure early in the process. ERC-related issues can surface during due diligence, potentially affecting the sale price of your business. Proactively addressing ERC claims can prevent unexpected liabilities down the road.
4. Consult with a Tax Professional
Now is the perfect time to seek advice from trusted tax professionals. Ensure your documentation is comprehensive, including all source documents that substantiate your eligibility and credit calculations. The IRS is moving swiftly on ERC audits, and you don’t want to scramble for paperwork once an audit begins.
5. Address Other Issues Before an Audit
Taxpayers must also consider amending income tax returns. If you claimed ERC, ensure wages weren’t deducted for income tax purposes when calculating your ERC. This compliance is vital to avoid complications during an audit.
If You’re Considering Filing an ERC Claim
If you’re contemplating filing an ERC claim, tread carefully. The IRS moratorium on processing new claims and its intensified enforcement efforts should prompt you to weigh the benefits and risks thoroughly. Choose your tax professional wisely. The IRS has cautioned against predatory practices by third-party preparers. Look for someone with a proven relationship and experience with ERC claims.
The IRS takes the taxpayer’s history with their preparer into account. Claims prepared by someone who knows your business may receive more favorable treatment.
1. Prepare for the Long Haul
Expect delays in receiving payments. Many taxpayers have waited years for ERC refunds. The IRS is currently processing claims more slowly due to an influx of submissions. Understand that ERC claims are filed on employment tax returns, not income tax returns. This means eligibility is determined quarterly, making ERC audits complex and potentially extensive.
Given the IRS’s heightened scrutiny, you must prepare for the possibility of a burdensome audit. An ERC audit can spiral into broader tax issues if not managed properly. The cost of navigating an audit without professional help can be significant.
2. Managing Your ERC Audit Risk
The IRS has made its stance clear on ERC misuse, increasing the likelihood of audits for substantial claims. A seemingly straightforward audit can lead to significant administrative and financial burdens if you can’t satisfactorily respond to IRS inquiries. If you receive a notice regarding your ERC claim, working with experienced tax professionals can make all the difference.
b. IRS Accepting Applicants for 2025 Compliance Assurance Process with Expanded Eligibility Criteria
The IRS is now accepting applications for the 2025 Compliance Assurance Process (CAP) program, running from September 4 to October 31, 2024. This initiative aims to foster transparency and cooperation between taxpayers and the IRS, enhancing federal tax compliance by resolving issues before filing returns.
Who is Eligible?
To qualify for the CAP program, applicants must meet the following criteria:
- Asset Requirements: Your business must have assets totaling $10 million or more.
- Corporate Structure: You must be a U.S. publicly traded corporation required to file SEC Forms 10-K, 10-Q, and 8-K, or a privately held C-corporation, including foreign-owned entities.
- Financial Documentation: Privately held applicants must submit audited financial statements annually and unaudited financial statements quarterly, all compliant with U.S. GAAP or IFRS as deemed suitable by the IRS.
- No Ongoing Investigations: Applicants must not be under investigation by or involved in litigation with any government agency that would limit the IRS’s access to their tax records.
Updates and Changes for 2025
This year’s CAP program comes with revised eligibility criteria and updates to facilitate participation. Notably, the new Bridge Plus component expands applicant eligibility and introduces exceptions for international issues.
The IRS will notify applicants of their acceptance into the program by February 2025. You can find detailed information about the CAP program, including eligibility criteria and application details, on the IRS CAP webpage.
FAQs
Ques. What are the chances of being audited by the IRS in 2024?
Ans. In 2024, the audit rate remains relatively low, around 0.4%. However, high-income earners and certain industries face increased scrutiny.
Ques. How to prepare for an IRS audit?
Ans. Gather your financial documents, including tax returns, receipts, and bank statements. Understand the IRS audit process and know your rights.
Ques. How do I prepare for being audited?
Ans. Review your tax returns thoroughly and ensure all records are accurate. Consider consulting a tax professional for guidance.
Ques. What are the odds that such a taxpayer will be audited?
Ans. Odds vary based on income and deductions. Generally, higher-income taxpayers have a greater likelihood of an audit.
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