The IRS is currently navigating through plans to prevent increased audits on taxpayers making less than $400,000. However, experts caution that certain aspects of your tax return can still draw attention from the IRS, regardless of your income level. The Treasury Inspector General for Tax Administration (TIGTA) recently reported that the IRS has made minimal progress in developing the methodology for its audit coverage calculation to adhere to the U.S. Department of the Treasury’s directive.
In August 2022, Congress approved an $80 billion funding allocation for the IRS, with a significant portion earmarked for enforcement activities. However, the Treasury Department issued a directive to the IRS stating that these funds should not be used for increased audits on small businesses or households earning less than $400,000 annually. Despite this directive, the IRS remains focused on enforcing tax compliance among higher earners, large corporations, and complex partnerships.
The Treasury Department announced that $1.3 billion has been recovered from “high-income, high-wealth individuals.” Treasury Secretary Janet Yellen voiced concern over the evasion of tax payments by some of the wealthiest Americans while everyday citizens struggle to meet their tax obligations.
Tax experts warn that regardless of income level, certain red flags on your tax return can raise suspicions and potentially trigger an IRS audit. Missing income is a common red flag, as employers and financial institutions report earnings directly to the IRS through Forms W-2 or 1099. Failure to accurately report this income can lead to enforcement actions by the IRS. Crypto investors are also under scrutiny, with mandatory yearly reporting set to kick in from 2026 onward.
Another audit trigger highlighted by experts is claiming unreasonable deductions. For example, if you earn $75,000 per year but claim $15,000 to $20,000 in charitable deductions, the IRS may question the accuracy of your claims. Detailed documentation is essential to support any tax breaks or deductions claimed on your return to avoid potential issues during an audit.
Despite the heightened focus on tax enforcement, IRS audits remain relatively rare. Between 2013 and 2021, only 0.44% of individual returns and 0.74% of corporate returns were examined by the IRS. This indicates that while the IRS is targeting specific groups for audits, the overall chances of being audited are still low.
It is important for all taxpayers to ensure accurate and detailed reporting on their tax returns to avoid potential audits by the IRS. While the agency continues to focus its enforcement efforts on high-income individuals and complex corporations, everyday taxpayers should still be vigilant about red flags that could attract unwanted attention from the IRS. By staying informed and compliant with tax regulations, individuals can minimize the risk of facing audit scrutiny and penalties.