As tax season approaches, many Americans are feeling the pressure of potential IRS audits. While recent enforcement efforts have mainly targeted high-income individuals, large corporations, and complex partnerships, everyday taxpayers are not exempt from scrutiny. In fact, certain issues are more likely to trigger an audit, causing anxiety among taxpayers nationwide. With the Internal Revenue Service (IRS) increasing its focus on service, technology, and enforcement, it is crucial for taxpayers to understand the red flags that may put them at risk.
The term “audit lottery” has been coined to describe the arbitrary nature of IRS audits. Ryan Losi, a certified public accountant and executive vice president of CPA firm Piascik, warns taxpayers against facing this uncertain fate. While audit rates of individual income tax returns have decreased for all income levels from 2010 to 2019, the decline can be attributed to lower IRS funding rather than a reduced need for audits. In fiscal year 2022, the IRS audited 0.38% of every 1,000 returns, down from 0.41% in the previous year. Despite this decrease, many Americans may have a false sense of security concerning their personal audit risk.
When it comes to IRS audits, certain triggers are more likely to draw attention from the agency. One significant red flag is missing income that is easily detectable through information returns. These forms, such as the Form 1099-NEC for freelance income or the Form 1099-B for investment earnings, are sent by employers and financial institutions directly to the IRS. Failing to report this income on your return is a common mistake that can lead to trouble with the IRS.
Another red flag that could increase the likelihood of an audit is excessive deductions compared to your income level. If you claim itemized deductions, such as charitable deductions, that are proportionate to those made by individuals with significantly higher incomes, it may raise eyebrows at the IRS. Detailed substantiation is crucial in such cases, as failure to provide evidence during an audit can result in the loss of the deduction.
Accuracy is vital when filing your tax return, especially when claiming deductions and tax breaks. Experts recommend using actual expenses instead of estimates to ensure accuracy. Claiming round numbers for four- or five-digit deductions is highly suspicious and may make you a target for an audit. It is best to provide detailed and proper documentation to substantiate your claims to avoid any issues with the IRS.
The earned income tax credit (EITC) is a tax break designed to benefit low- to moderate-income workers. However, this credit has historically been under scrutiny due to its high “improper payments rate.” Higher-income earners are more likely to face an audit, but EITC claimants have a 5.5 times higher audit rate than the average filer. Part of the reason for this elevated risk is the prevalence of improper payments associated with the credit.
However, starting in fiscal year 2024, the IRS has pledged to significantly reduce the number of correspondence audits for EITC claimants. This change aims to strike a balance between ensuring accuracy and reducing the burden on eligible taxpayers.
While there is no foolproof method to entirely eliminate the risk of an audit, you can take several steps to minimize your chances. Keeping meticulous records, maintaining accurate documentation, and double-checking your return for errors are critical. Seeking professional help from a certified public accountant or tax advisor can also provide guidance in understanding complex tax laws and regulations.
Additionally, staying informed about changes in tax policies and updates from the IRS can go a long way in avoiding common mistakes. By filing your taxes accurately and providing adequate substantiation, you can minimize your audit risk and ensure a smooth tax season.
As Americans navigate the intricacies of tax season, the concern of IRS audits looms over many taxpayers’ heads. Although recent enforcement efforts have largely targeted high-income individuals and corporations, everyday filers can still find themselves at risk. Understanding the red flags that trigger audits and taking the necessary precautions to mitigate that risk is crucial. By staying informed, keeping accurate records, and seeking professional guidance, taxpayers can minimize their audit risk and approach tax season with confidence.
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