Filing taxes can induce anxiety for many, especially when the looming possibility of an IRS audit comes into play. With recent funding boosts aimed at increasing scrutiny on high-income earners, taxpayers are rightfully concerned about their chances of being chosen for a review. In this article, we will delve into what triggers an audit, the role of the IRS in scrutinizing returns, and how taxpayers can protect themselves through informed filing practices.
The IRS has made it clear that it intends to enhance its auditing efforts, particularly focusing on the wealthiest individuals. With an infusion of funds and a stated goal of doubling audit rates for high earners, the future audit landscape is shifting. This new direction beckons questions about the IRS’s broader priorities, especially in light of recent leadership changes and potential political influences. Nevertheless, tax practitioners like Mark Baran from CBIZ indicate that some patterns are emerging, highlighting “low-hanging fruit” areas that may attract more IRS attention.
Many taxpayers harbor misconceptions about what can flag their returns for an audit. One significant trigger is the discrepancy between reported income and the information submitted via third-party tax documents, such as W-2 and 1099 forms. The IRS’s sophisticated software aligns taxpayer information against these forms, making mismatches a red flag. Elizabeth Young of the AICPA emphasizes that failing to accurately report all income can result in unfavorable scrutiny from the IRS.
Moreover, substantial deductions relative to reported income can raise eyebrows. Taxpayers may feel tempted to maximize deductions, but as Baran wisely cautions, outliers—such as charitable contributions exceeding the general range for their income brackets—can lead to additional inquiries. The IRS employs algorithms to analyze returns against demographic data, and any significant deviation can open the door to a deeper review.
Another common source of audit confusion is the Earned Income Tax Credit (EITC), particularly relevant for low- to moderate-income earners. While this credit serves as a valuable benefit, its complexity often leads to improper claims. Law professor Robert Nassau from Syracuse University suggests that the intricacies surrounding eligibility—based on factors such as earnings, family size, and residency—mean that the EITC sees almost six times the audit rate compared to other tax filers. This reality underscores the need for diligent record-keeping and understanding of tax credits to minimize the risk of unnecessary scrutiny.
Despite the fears that audits incite, they remain relatively uncommon. Data collected by the IRS for the fiscal year 2023 reveals that only 0.44% of individual returns were selected for audit during the period analyzed from 2013 to 2021. Most audits are conducted through correspondence, meaning that taxpayers often receive requests for documentation by mail rather than face-to-face interaction. Over 77% of audits were performed through this method, allowing the IRS to streamline the process.
Regardless of the audit method, taxpayers must maintain comprehensive documentation of their financial activities. As Baran states, those equipped with proper records can confidently navigate the audit process. This preparation not only includes receipts for deductions claimed but also a clear understanding of the tax code pertaining to various credits and deductions claimed on the return.
To minimize the likelihood of an audit, taxpayers should adopt best practices during preparation. Accurate reporting of income, avoiding rounding numbers, and steering clear of estimations can significantly reduce risks. Additionally, ensuring that all eligible paperwork is submitted and clearly reflected on returns will help create a solid defense against audits. Engaging with tax professionals can also provide assistance in accurately navigating complex tax laws and regulations.
In a world where tax codes evolve and IRS practices change, taxpayers must remain vigilant and educated. By understanding the intricacies of tax filing and keeping meticulous records, individuals can lessen their anxiety surrounding audits and ensure compliance with IRS regulations. Ultimately, preparation is key to surviving the complexities of tax season without fear of the dreaded audit.