IRS audit red flags remain despite agency budget cuts

This season, the IRS is smaller after staffing cuts from Elon Musk’s Department of Government Efficiency, or DOGE, and other 2025 reductions.

As millions of filers race to meet the April 15 tax deadline, they may wonder if being picked for an IRS audit is now less likely amid the agency’s trimmed workforce.

As of Dec. 18, the IRS was about 27% smaller compared to the start of 2025, with the workforce falling from more than 102,000 in January 2025 to about 74,000 in December, according to the Taxpayer Advocate Service.  

That won’t necessarily reduce your audit risk, experts say. There are “various ways” IRS enforcement touches taxpayers, such as automated math error notices, the agency’s matching program for tax forms, exams by mail and in-person field audits, according to Eric Hylton, national director for tax consulting firm Alliantgroup.

And certain issues can be “low-hanging fruit” for an audit, even with staffing cuts, said Hylton, who is also a former IRS commissioner for the agency’s small business and self-employed division.

If your return is missing income reported to the IRS via so-called “information returns” or tax forms such as 1099s or W-2s, the agency’s automated underreporter flags these discrepancies.

The agency then sends a CP2000 notice, which is an IRS proposal to change your income, payments, credits or deductions on your return. By comparison, correspondence audits, which also happen by mail, are a broader, but still limited, examination of your filing.

During fiscal year 2024, nearly 80% of exams happened via correspondence, and the remaining were in-person field audits, according to the latest agency data.

For tax years 2014 through 2022, the IRS has audited 0.40% of individual returns. However, some 2022 returns are still within the agency’s three-year statute of limitations, and the final percentage could change.

Democrats in 2022 approved nearly $80 billion in funding for the IRS through 2031, with $45.6 billion for enforcement.

The agency said it would use the funds to reverse “historically low audit rates” of large corporations, complex partnerships and higher earners. The audit rate for taxpayers earning $1 million or more was 0.7% in 2019, compared to 7.2% in 2011, according to the IRS.

But that 2022 enforcement allocation has fallen to $3.8 billion after Republican rescissions, according to a March 2026 report from the Treasury Inspector General for Tax Administration, an independent organization within the Treasury.

President Donald Trump’s fiscal year 2027 budget request released on April 3 aims to further slash agency funding. If enacted by Congress, the IRS’ enforcement budget would fall by 18% compared to fiscal year 2026.

Despite the reduced budget, “data-driven enforcement” is one of the three strategic priorities the IRS outlined in its fiscal year 2027 Congressional Justification. 

“The IRS is modernizing enforcement through expanded use of artificial intelligence, advanced analytics, and improved data integration,” IRS CEO Frank Bisignano wrote in the April 3 report. 

“These tools allow us to more precisely identify high-risk noncompliance and fraud, deter identity theft, and focus enforcement resources on higher-value cases,” he wrote.

Here are some areas that could trigger more IRS scrutiny amid the latest agency updates, experts say.

While the IRS doesn’t publish its criteria for audit selection, experts say the agency uses software to flag returns that fall outside what are considered normal deductions compared to earnings.

This could apply to itemized tax breaks, such as the charitable deduction, or unusually high business expenses reported on Schedule C for net business income, Hylton said.

For example, someone might have $30,000 to $40,000 in losses reported on Schedule C but only made $60,000 from their W-2 job, he said.

“There are easy ways for AI or data analytics to match that up,” and the agency could question that by correspondence, Hylton said. That’s why it’s always important to keep detailed records to support claims made on your return.

Another type of tax break the IRS watches more closely is refundable tax credits, which can trigger a refund even if no taxes are owed, according to tax consultant Victoria Boon of Boon Tax Educators, who spent more than 20 years working for the IRS.

“Any kind of refundable credit … the IRS is going to scrutinize a little bit more,” she said.

One example is the earned income tax credit, or EITC, a tax break for low- to moderate-income workers, Boon said. The credit is worth up to $8,046 for filers with three or more qualifying children for 2025 returns.

The EITC has strict eligibility requirements, including earnings, relationship and residency tests, which have contributed to incorrect payments, experts say.

Most EITC audits happen via correspondence, with the IRS requesting further documentation to prove the filer is eligible for the credit. During fiscal year 2022, the IRS examined 0.7% of returns claiming the EITC, according to the latest IRS data.