IRS Audit Rates in 2025: Who Is Most at Risk?

The IRS received significant new funding in recent years with a mandate to increase enforcement. While the agency has committed to not increasing audit rates for households earning under $400,000, high-income taxpayers, businesses, and certain return characteristics continue to attract elevated scrutiny. Here's what California taxpayers should know about audit risk in 2025.

Who Faces the Highest Audit Risk

IRS audit selection uses a combination of automated scoring, document matching, and specific enforcement initiatives. In 2025, the taxpayers facing elevated audit risk include:

High-Income Individuals

Returns showing income over $500,000 face significantly higher audit rates than middle-income returns. The IRS has specifically committed additional resources to auditing millionaires and billionaires who have not complied with back-tax obligations. Returns showing income over $10 million face the highest examination rates.

Businesses with Large Cash Transactions

Cash-intensive businesses — restaurants, retail, contractors — that show high revenue but unusually low taxable income relative to industry norms are flagged by IRS statistical models. The IRS compares returns to industry standards and investigates significant deviations.

Self-Employed Taxpayers with Schedule C Losses

Schedule C filers (sole proprietors) showing losses — especially multiple consecutive years of losses — attract IRS attention. The IRS distinguishes between legitimate business losses and hobby losses that do not qualify for deduction.

Cryptocurrency Holders

The IRS has significantly expanded its cryptocurrency enforcement. Taxpayers who received cryptocurrency, exchanged it, or used it for purchases without reporting transactions face elevated audit risk. The IRS receives third-party reporting from cryptocurrency exchanges and cross-references it against returns.

Returns with Large Charitable Deductions

Charitable deductions that are unusually large relative to income — particularly non-cash contributions including conservation easements and donated property — continue to draw IRS scrutiny. Valuation disputes on donated property are among the most contested audit issues.

Unreported Foreign Assets

U.S. persons with foreign financial accounts above $10,000 must file an FBAR. Failure to report foreign assets can result in substantial penalties. The IRS has ongoing enforcement programs targeting unreported offshore accounts and assets.

What to Do If You Are Audited

The most important step when you receive an IRS audit notice is to respond — and to respond thoughtfully. Do not ignore IRS correspondence, but also do not respond without understanding what is being requested and what your options are. For anything beyond a simple correspondence audit, consulting a tax attorney or enrolled agent before responding is strongly advisable.

See our complete IRS Audit Guide for California Taxpayers for a step-by-step overview of the audit process and your rights.