Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she’s looking at four questions on your chances of an IRS tax audit and audit red flags you should know. (Get a free issue of The Kiplinger Tax Letter or subscribe.)
1. What are my chances that I will be audited by the IRS?
Question: I am getting ready to file my 2025 tax return (I applied for a filing extension). Friends have told me that I don’t have to worry about IRS audits anymore. Is that true
Joy Taylor: No. That information is incorrect. It is true that major cuts to the IRS’s funding and its workforce will reduce the number of tax audits the agency can do each year. In recent years, the IRS audit rate for individuals was significantly below 1%, and we expect this figure to continue to decline, at least over the next few years. But that doesn’t mean it’s a tax cheat free-for-all. According to IRS leaders, there will be fewer overall audits, but the exams that are done will be more targeted.
The IRS is relying more on data analytics and artificial intelligence to more precisely identify high-risk noncompliance and to improve efficiency. Data-mining software can sift through taxpayer data, expose suspicious activity and identify audit cases.
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Additionally, your chances of an IRS audit could go up, depending on various factors or red flags, including the amount of income you report, the complexity of your return, the types and amounts of deductions or other tax breaks you claim, whether you’re engaged in a business, or whether you own foreign assets.
2. Tax audits and refundable tax credits
Question: I am a tax preparer, and many of my clients claim refundable tax credits on their federal returns, such as the earned income credit, the refundable portion of the child credit, the Obamacare premium credit and the American Opportunity credit. I heard that the IRS will be eyeing these credits more than ever before. Do you think this is true?
Joy Taylor: Yes. The IRS’s enforcement arm is feeling the brunt of the government funding cuts and recent employee resignations and layoffs. Many of the workers who retired or left the IRS were experienced agents and managers with deep knowledge of the tax law and the processes for conducting complex tax audits of individuals and businesses.
We expect that the IRS will go after low-hanging fruit, such as questionable refundable tax credits claimed on tax returns. Most of these audits are done through correspondence, meaning the taxpayer never meets with an IRS employee. They’re a bit more cost-effective, since the audit is generally limited to only one or two issues. The IRS also knows that there is lots of money lost each year to erroneous claims of refundable tax credits. The IRS estimated it improperly paid $21.4 billion in refundable credits in fiscal year 2024 alone.
3. S corporation and partnership audits
Question: I am a partner in a closely held limited partnership. I heard that the IRS is using some of its $80 billion windfall from the Inflation Reduction Act to beef up audits of partnerships. Can you provide details on this?
Joy Taylor: It is true that the 2022 Inflation Reduction Act gave the IRS $80 billion to be withdrawn over 10 years for improved taxpayer service, increased enforcement efforts and modernization. In 2023 and 2024, the IRS went on a hiring spree and began to beef up enforcement areas that were neglected over the past decade or so. This included audits of pass-through entities, such as partnerships, LLCs and S corporations, and exams of higher-income individuals.
Much of the IRS’s efforts to bolster its enforcement arm were for naught. The vast majority of the IRS’s $80 billion windfall has been rescinded by Congress. And since President Trump began his second term in office in January 2025, the IRS has lost over 20% of its total workforce, and its annual funding has declined. And things promise to only get worse for the agency. The Trump administration’s fiscal year 2027 budget request for the IRS includes an 18% additional cut in enforcement money and projects fewer than 25,000 total enforcement employees.
The IRS’s scarcer audit resources are leading to decreased numbers of audits, including audits of high-income individuals and partnerships. The number of IRS audits of individuals with $10 million or more of income and partnerships has fallen from 6,786 and 3,174, respectively, in fiscal year 2025 to 2,264 and 2,932 in fiscal year 2026. The IRS forecasts even further drops in these audits in fiscal year 2027.
4. Audit red flags
Question: What does the IRS take into account in deciding whether to audit a taxpayer’s Form 1040?
Joy Taylor: We don’t know exactly the IRS’s formula for choosing returns to audit. That’s a closely held secret. But we are aware of various factors or red flags that could escalate one’s chance in the unenviable audit lottery.
I wrote a story setting forth 15 IRS audit red flags. They are:
- Failing to report all taxable income
- Making a lot of money
- Failing to file your income tax return
- Taking higher-than-average deductions, losses or credits
- Claiming refundable tax credits
- Taking large charitable contribution deductions
- Running a business
- Writing off a hobby loss
- Failing to report self-employment income and pay self-employment taxes
- Claiming rental losses
- Taking a distribution from an IRA or 401(k) before age 59½
- Failing to report gambling winnings or claiming big gambling losses
- Claiming the foreign earned income exclusion when working overseas
- Engaging in virtual currency or other digital asset transactions
- Failing to report a foreign bank account
About Ask the Editor, Tax Edition
Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You’ll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.
We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!
Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.