As tax season unfolds, the anxiety surrounding potential IRS audits looms large for many taxpayers. Acknowledging the agency’s recent funding boost, the IRS has committed to increasing its audit frequency, specifically targeting the wealthiest individuals. However, the evolving landscape of the agency’s priorities—amid shifts in congressional leadership—adds a layer of uncertainty for filers. While the prospect of an audit can be intimidating, recognizing key areas that may trigger scrutiny can help taxpayers navigate the process with greater confidence.
Audit Triggers: What You Need to Know
One of the primary concerns for taxpayers is the potential to raise red flags on their tax returns. Financial experts emphasize that avoiding any estimations or rounding of numbers on tax returns is crucial. Mark Baran, a managing director at CBIZ’s national tax office, warns that doing so can significantly increase the likelihood of an audit. Taxpayers are essentially taking risks by entering imprecise figures, which can attract the attention of the IRS.
Another common pitfall occurs when taxpayers fail to report all their income, often due to oversight related to “information returns.” These include crucial forms like W-2s and various 1099s that report income from employers or other financial transactions. The IRS employs sophisticated software to cross-check reported figures against these information returns, so any discrepancies can lead to an audit. Elizabeth Young from the American Institute of Certified Public Accountants (AICPA) highlights the importance of meticulous record-keeping to avoid mismatched information.
A notable aspect that often attracts IRS attention is the reporting of deductions that appear disproportionately high relative to a taxpayer’s income. The IRS utilizes algorithms to evaluate the proportion of deductions across similar income brackets. For instance, if a taxpayer claims charitable deductions that constitute a significant portion—say, between 30% and 50%—of their adjusted gross income, that could trigger additional scrutiny. In such cases, taxpayers should be prepared to furnish documentation to substantiate these deductions if questioned.
The earned income tax credit (EITC) represents another area of concern, particularly because it has a notably higher audit rate compared to other claims. Robert Nassau, a law professor at Syracuse University, points out that the eligibility criteria for claiming the EITC can be complex and often lead to misunderstandings. In fact, low- to moderate-income earners claiming the EITC are audited at a rate approximately 5.5 times greater than the average taxpayer, mainly due to improper claims.
Despite these red flags, it’s essential to keep in mind that IRS audits are not as common as one might fear. According to IRS statistics, for the fiscal year 2023, only 0.44% of individual tax returns filed between 2013 and 2021 were audited. Many audits are conducted through correspondence, where the IRS reaches out via mail for clarification, rather than through face-to-face interactions. In fact, over 77% of audits were correspondence audits in 2023. Baran emphasizes that taxpayers who maintain thorough documentation—such as receipts and financial records—should feel secure throughout the audit process.
Ultimately, while having an understanding of what may trigger an IRS audit is vital for taxpayers, it should not instill a sense of dread. Instead, it is a call to be diligent in preparing and filing accurate tax returns. As tax laws and IRS practices evolve, remaining informed will equip taxpayers to navigate potential pitfalls more effectively and maintain compliance with confidence. By adhering to best practices in tax preparation, individuals can alleviate some of the anxiety that accompanies tax season, ensuring a smoother experience overall.
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