The IRS is currently in the process of developing plans to prevent increased audits on taxpayers making less than $400,000. However, tax experts warn that certain aspects of your tax return can still attract scrutiny, regardless of your income level.
The Treasury Inspector General for Tax Administration (TIGTA) recently reported that the IRS has made “limited progress” in creating the methodology for its audit coverage calculation to comply with a directive from the U.S. Department of the Treasury. This directive follows Congress’s approval of $80 billion in IRS funding in August 2022, which included a significant amount earmarked for enforcement purposes.
Despite the directive, the IRS has still been concentrating its enforcement efforts on higher earners, large corporations, and complex partnerships. In a recent announcement, the Treasury Department revealed that $1.3 billion has been recovered from “high-income, high-wealth individuals.” Treasury Secretary Janet Yellen emphasized the importance of holding wealthy individuals accountable for their tax obligations.
According to tax experts, there are several red flags that can trigger an IRS audit, regardless of your income level. One common red flag is missing income, as the IRS receives information returns directly from employers and financial institutions. Failure to report all of your income accurately can raise suspicions and lead to an audit.
Crypto investors are also under increased scrutiny, as the IRS has finalized cryptocurrency tax guidelines that include mandatory reporting requirements for digital asset brokers. Starting in 2026, annual reporting will phase in to cover activity from 2025. Failure to comply with these reporting requirements can result in an IRS audit.
Claiming unreasonable deductions, such as excessively high charitable contributions relative to your income, can also raise red flags with the IRS. Taxpayers are advised to maintain detailed documentation to support all deductions claimed on their tax returns. Without proper documentation, deductions may be disallowed during an audit.
Despite the focus on potential audit triggers, IRS audits remain relatively rare. Between 2013 and 2021, only 0.44% of individual tax returns and 0.74% of corporate tax returns were examined by the IRS. While the chances of being audited are low, it is still crucial to file accurate and complete tax returns to avoid IRS scrutiny.
Understanding the potential triggers for an IRS audit and taking steps to avoid them can help taxpayers minimize their risk of facing an audit. By accurately reporting all income, maintaining detailed documentation for deductions, and complying with reporting requirements for investments like cryptocurrency, taxpayers can reduce their chances of being targeted for an audit by the IRS.