As the IRS continues to work on plans to avoid increased audits on taxpayers making less than $400,000, certain aspects of your tax return can still trigger scrutiny, according to experts. While the focus of the IRS enforcement efforts is on higher earners, large corporations, and complex partnerships, everyday taxpayers could still face audits if they haven’t filed accurate returns.
One common red flag that can trigger an IRS audit is missing income. Employers and financial institutions report earnings directly to the IRS using forms like W-2 or 1099. Incomplete filings can easily be flagged by the agency once they have access to this information. This practice has been cited as having a significant return on investment for the IRS. Additionally, crypto investors will also be subject to scrutiny based on income reported via information returns. The IRS finalized cryptocurrency tax guidance in July, including guidelines for digital asset brokers.
Another trigger for an IRS audit is claiming unreasonable deductions. For example, if a taxpayer making $75,000 per year claims $15,000 to $20,000 in charitable deductions, it could raise suspicion with the IRS. Detailed paperwork is essential to support every line item when claiming a tax break. During an audit, a credit or deduction could be disallowed without proper proof.
Despite the areas of heightened scrutiny and potential red flags, it’s important to note that IRS audits are still relatively rare. Between 2013 and 2021, the IRS examined only 0.44% of individual returns and 0.74% of corporate returns. This demonstrates that the likelihood of facing an audit, even with red flags present, is low for the majority of taxpayers.
While the IRS is focusing its enforcement efforts on higher earners and large corporations, everyday taxpayers should still be aware of certain red flags that can trigger an audit. Missing income and unreasonable deductions are two common triggers that taxpayers should be cautious about. Ensuring accurate and detailed tax filings can help prevent potential audits, even though the chances of facing one are relatively low. Stay informed about the latest IRS guidance and best practices to avoid being subject to scrutiny during tax season.