When it comes to the IRS, certain elements of your tax return can potentially draw attention, even if you are not in the high-income bracket. Experts caution that regardless of your yearly earnings, there are some red flags for IRS audits that you should be aware of.
One of the major red flags that can trigger an IRS audit is missing income on your tax return. Most employers and financial institutions issue information returns such as Forms W-2 or 1099 to report your earnings directly to the IRS. Failure to accurately report this income can easily attract the attention of the IRS and lead to further scrutiny.
According to Eric Hylton, the national director of compliance for Alliantgroup and a former IRS commissioner, incomplete filings based on information returns have a significant return on investment for the IRS. This means that failing to report all sources of income could increase your chances of being audited.
In addition to traditional income sources, the IRS has also started cracking down on cryptocurrency investors. With the finalization of cryptocurrency tax guidance in July, digital asset brokers are now required to report income from crypto investments. This mandatory reporting will begin to take effect in 2026 for activity from 2025 onwards.
Experts advise that crypto investors should be particularly careful when reporting their earnings and ensure that they are in compliance with the new guidelines to avoid triggering an audit.
Another potential red flag for an IRS audit is claiming unreasonable deductions on your tax return. For instance, if you earn $75,000 per year but claim $15,000 or $20,000 in charitable deductions, this could raise suspicion and lead to an audit.
Eric Hylton emphasizes the importance of keeping detailed paperwork to support every line item when claiming deductions. Without adequate proof, the IRS may disallow credits or deductions during an audit, potentially resulting in penalties or additional tax liabilities.
Despite the focus on specific red flags, it is essential to keep in mind that IRS audits are still relatively rare. According to the IRS’s latest Databook, only 0.44% of individual tax returns and 0.74% of corporate returns were examined between 2013 and 2021. This means that the likelihood of being audited remains low for the average taxpayer.
While the IRS is still developing plans to avoid increased audits for taxpayers making less than $400,000, it is crucial to be mindful of potential red flags that could trigger an audit regardless of your income level. By accurately reporting all sources of income, maintaining detailed records for deductions, and staying informed about tax regulations, you can reduce the risk of facing an IRS audit and ensure compliance with tax laws.
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