The IRS is currently working on strategies to prevent an increase in audits for taxpayers earning less than $400,000. While there are specific guidelines in place, experts suggest that certain aspects of your tax return can attract attention from the IRS, irrespective of your income level.
The Treasury Inspector General for Tax Administration (TIGTA) recently reported that the IRS has made limited progress in developing the methodology for its audit coverage calculation. This is in response to a directive from the U.S. Department of the Treasury. Despite receiving $80 billion in funding, some of which was designated for enforcement, the IRS has been directed not to increase audits for small businesses or households earning less than $400,000 annually.
Focused Enforcement Efforts
While the IRS has agreed to TIGTA’s recommendations regarding the development of its audit methodology, it continues to concentrate its enforcement efforts on higher-income individuals, large corporations, and complex partnerships. The Treasury Department has announced the recovery of $1.3 billion from high-income, high-wealth individuals. Treasury Secretary, Janet Yellen, emphasized the importance of holding wealthy individuals accountable for tax evasion.
Red Flags for IRS Audits
Tax experts have identified several red flags that could trigger an IRS audit, regardless of income level. One common trigger is missing income, as the IRS receives information returns directly from employers and financial institutions. Additionally, crypto investors are now required to report their income, following the IRS’s finalized cryptocurrency tax guidance.
Claiming unreasonable deductions, especially in relation to your income, can also raise suspicions with the IRS. For instance, claiming a large amount in charitable deductions compared to your income may prompt an audit. It is crucial to maintain detailed documentation to support all deductions and credits claimed on your tax return.
Despite the focus on certain income brackets and deductions, IRS audits remain uncommon. Between 2013 and 2021, the IRS examined only 0.44% of individual returns and 0.74% of corporate returns. This indicates that the likelihood of being audited by the IRS is relatively low for most taxpayers.
While the IRS is implementing measures to avoid increased audits for lower-income taxpayers, there are still certain factors that can attract scrutiny from the agency. By ensuring accuracy and transparency in your tax return, maintaining detailed records, and avoiding unreasonable deductions, you can minimize the risk of being audited by the IRS. Stay informed about changes in tax laws and reporting requirements to protect yourself from potential audits.