The IRS is still grappling with how to prevent increased audits on taxpayers earning less than $400,000. Despite this, certain aspects of your tax return can attract scrutiny, regardless of income. Experts caution that individuals should be aware of potential red flags that could prompt an audit.
Although the IRS is concentrating its enforcement efforts on high earners, large corporations, and complex partnerships, everyday taxpayers are not exempt from scrutiny. One crucial factor that can trigger an audit is the accuracy of your tax return. Failure to file a complete and correct return could result in increased IRS attention.
One common red flag for audits is missing income. Employers and financial institutions report earnings directly to the IRS using forms like W-2 or 1099. Incomplete filings can easily be identified by the IRS, making it essential to ensure all income is accurately reported. Failure to do so could lead to an audit.
Cryptocurrency investors are also subject to scrutiny based on income reported via information returns. The IRS recently released guidance on cryptocurrency tax reporting, including regulations for digital asset brokers. Starting in 2026, mandatory yearly reporting will begin, covering activity from 2025. Failure to comply with these regulations could result in IRS audits.
Claiming unreasonable deductions is another audit trigger highlighted by experts. For example, if you earn $75,000 annually and claim $15,000 or $20,000 in charitable deductions, it could raise IRS eyebrows. Detailed documentation is essential to support deductions claimed on your tax return. Failure to provide adequate proof during an audit could lead to disallowed deductions.
Despite areas of intense scrutiny, IRS audits remain relatively rare. Between 2013 and 2021, the IRS examined only 0.44% of individual returns and 0.74% of corporate returns. While audits are not common, it is still crucial to be cautious and diligent when filing your tax return to avoid potential red flags that could trigger increased IRS attention.
By understanding the various audit triggers and taking steps to avoid them, taxpayers can minimize the risk of being subject to IRS scrutiny. Ensuring the accuracy and completeness of your tax return, reporting all income sources, and providing detailed documentation for deductions claimed are essential practices to avoid potential audits. It is crucial for individuals to be proactive in their tax reporting to prevent unnecessary IRS attention and potential audit consequences.