As the tax season approaches, apprehension arises among millions of taxpayers concerning the possibility of an IRS audit. Recent funding boosts have led the IRS to signal intentions of intensifying scrutiny on high-income earners, although its future enforcement strategies remain uncertain due to leadership changes and shifting political landscapes. Amidst this, taxpayers must remain vigilant, as understanding the common triggers of audits can significantly mitigate their audit risk.
The fear of being selected for an audit can overshadow the tax-filing process for many individuals. According to recent statements from the IRS, the agency aims to enhance its auditing capabilities, particularly targeting wealthier taxpayers. However, the lack of clarity about the agency’s future directives, exacerbated by a politically divided government, leaves many questioning what this could mean for their personal tax situations. While audits generally remain infrequent, characterized by an audit rate that stands at approximately 0.44% for individual returns in recent years, understanding the factors that could attract IRS attention is essential.
Identifying Common Red Flags
Tax experts emphasize that certain practices can easily elevate one’s chances of being audited. For instance, making rough estimates on income and expenses, such as rounding figures, is ill-advised. Doing so invites unnecessary scrutiny, as it deviates from accurate record-keeping, which the IRS highly values. Mark Baran, a managing director at CBIZ, warns that taking liberties with financial data can lead to what he describes as playing the “audit lottery,” increasing the risk of receiving an audit notice.
One significant risk area involves the mismatch of reported income compared to what is documented on various “information returns,” such as W-2 or 1099 forms. The IRS employs sophisticated algorithms that compare individual tax returns against these data submissions from employers and financial institutions. Any discrepancies between reported income and these forms can trigger an audit, as stated by Elizabeth Young, a director at the American Institute of Certified Public Accountants.
Additionally, taxpayers should consider how their deductions compare to those of their peers within the same income bracket. The IRS might closely examine returns that show unusually high deductions, particularly charitable contributions that constitute a significant percentage of one’s income. Even deductions that may seem justified can draw the attention of the IRS if they appear to exceed normal parameters.
Careful Claims: The Earned Income Tax Credit
One prominent target for IRS audits is the Earned Income Tax Credit (EITC). Designed to assist low to moderate-income workers, the EITC carries a notably high audit rate—5.5 times greater than that of other tax filers. Misunderstandings about eligibility requirements tied to income, family size, and residency can lead to improper claims. This confusion can escalate the perceived risk of defrauding the IRS, prompting more rigorous reviews of those claiming the credit.
Auditing Process: What to Expect
While the fear of an audit can be palpable, it is essential to recognize that many audits arise from minor errors or innocent oversights. The majority of audits occur through correspondence, wherein the IRS communicates via mail rather than face-to-face interactions. This indirect approach accounts for more than 77% of audits, suggesting that most audits do not involve complex in-person sessions. Taxpayers who maintain thorough documentation—such as receipts and financial records—should approach the situation with less apprehension. Baran advises that well-prepared individuals are likely to encounter a lower level of scrutiny.
The key to alleviating audit anxiety lies in diligence and organization. Taxpayers should ensure accuracy in their filings, particularly in reporting income and claiming deductions. By steering clear of common pitfalls such as rounding numbers and improperly claiming credits like the EITC, filers can considerably lower their risk of attracting IRS attention. While shifts in IRS auditing practices may arise, one thing remains steadfast: a meticulous approach to record keeping is invaluable. In the end, understanding and adhering to fundamental tax principles can help secure peace of mind during tax season.