As the tax season rolls around, taxpayers often find themselves grappling with anxiety due to the looming threat of an IRS audit. With heightened scrutiny expected following new funding aimed at increasing audit rates, particularly among high-income earners, the stakes are higher than ever. Understanding the common triggers for audits can empower taxpayers to file their returns with greater confidence and reduce the likelihood of being singled out for further examination.
Recent developments have indicated a more assertive IRS, with plans to double audit rates for the wealthiest taxpayers. This shift has the potential to reshape the audit landscape, particularly amidst fluctuating political dynamics and leadership changes within the agency. The ability of the IRS to concentrate its efforts on certain categories of taxpayers often hinges on resource allocation and policy direction. For many, this raises the question: what constitutes a red flag for audits, and how can one avoid them?
Tax experts, including Mark Baran from CBIZ, emphasize the importance of accuracy in tax reporting. One significant misstep is the rounding of numbers or estimating expenses, which can resemble playing an “audit lottery.” Such practices leave taxpayers vulnerable to scrutiny, as the IRS employs algorithms to identify discrepancies and inconsistencies across tax returns. For example, a taxpayer’s failure to report income may be discovered through various information returns, such as Form W-2 from employers or Form 1099 for freelance work.
Additionally, Baran notes that exaggerated deductions compared to reported income can trigger further investigation. The IRS possesses a comprehensive database that allows it to evaluate the legitimacy of deductions against benchmarks within the same income bracket. If a taxpayer’s charitable contributions reach an unusually high percentage of their adjusted gross income, it may raise suspicions.
Among the most scrutinized areas for audits are claims for the Earned Income Tax Credit (EITC), a refundable benefit aimed at supporting low- to moderate-income earners. Professor Robert Nassau from Syracuse University highlights that confusion surrounding EITC eligibility can result in improper claims, thus attracting IRS attention. Notably, the audit rate for individuals claiming the EITC is significantly elevated—5.5 times higher than average filers. This disproportionate risk underscores the need for clarity and accuracy when claiming such credits.
Despite these concerns, it is crucial to note that IRS audits remain relatively rare. Data indicates that as of fiscal year 2023, only 0.44% of individual returns from 2013 to 2021 were audited. When audits do occur, they often take the form of “correspondence audits,” where the IRS communicates via mail rather than conducting face-to-face examinations. This method accounted for over 77% of audits reported by the IRS in the latest fiscal year.
Taxpayers can mitigate the risks of audits by maintaining thorough records and substantiating their claims. Baran stresses the importance of keeping receipts and documentation to support any deductions or credits claimed on tax returns. Those who approach the tax filing process with diligence and preparedness are less likely to be the target of IRS audits. The IRS recognizes that taxpayers who are organized and capable of providing necessary documentation tend to pose less of a risk, thus reducing the chances of further scrutiny.
While the fear of an IRS audit can be daunting, understanding the factors that trigger scrutiny can help taxpayers navigate tax season more effectively. By avoiding common pitfalls and being proactive in maintaining accurate records, individuals can reduce their odds of being audited. As the IRS continues to evolve its approach to auditing in light of increased funding, taxpayers can stay one step ahead by remaining informed and prepared.