Discover important IRS audit red signs for everyday taxpayers and how to prevent unwanted inspection of your tax returns.
The IRS has pledged to limiting audits for taxpayers earning less than $400,000, but certain components of tax returns might still cause concern, even for regular filers.
According to a recent report from the Treasury Inspector General for Tax Administration (TIGTA), the IRS has made "limited progress" in developing its audit coverage methodology. This is in response to a direction from the US Department of the Treasury aimed at ensuring that the recent $80 billion in IRS budget authorized by Congress in August 2022 does not boost audits of small businesses or households with yearly incomes of less than $400,000.
Despite this guarantee, the IRS has increased its enforcement operations targeting higher income persons, huge enterprises, and complex partnerships. The Treasury recently reported the successful recovery of $1.3 billion from "high-income, high-wealth individuals." Treasury Secretary Janet Yellen stated, "It's not fair that everyday Americans pay their taxes while some of the wealthiest evade payment."
Here are some common audit red flags that taxpayers should consider:
Unreported Income: One of the most obvious reasons for an audit is omission of income. Employers and financial organizations record profits directly to the IRS using information returns such as Forms W-2 and 1099. If your stated income does not match the requirements of these documents, you will most likely face an audit. According to Eric Hylton, former IRS commissioner and current national director of compliance at Alliantgroup, the IRS expects a high return on investment from these checks.
Cryptocurrency Transactions: Investors in cryptocurrencies should be aware that the Internal Revenue Service has established new tax guidelines for digital assets. Brokers will be required to submit annual reports beginning in 2026, and analysts anticipate more policing of cryptocurrency transactions. According to James Creech, a senior manager at Baker Tilly, many people expect strict regulation in this area.
Excessive Deductions: Claiming disproportionate deductions compared to your income can potentially draw attention. For example, if you make $75,000 but claim $15,000 or $20,000 in charitable contributions, the IRS may question the legitimacy of your deductions. Hylton emphasizes the significance of keeping complete records to support each claimed deduction. Without sufficient documentation, the IRS may deny these credits during an audit.
Despite the existence of these triggers, IRS audits continue to be rare. Only 0.44% of individual tax returns and 0.74% of corporate filings were audited between 2013 and 2021, according to the IRS's most recent Databook, as of fiscal 2023. As a result, while taxpayers should be watchful, the actual likelihood of receiving an audit is low.
