As tax season approaches, millions of Americans grapple with the complexities of filing their returns. Amid concerns about audits, especially in light of the IRS’s declared intentions to double audit rates for high-income earners, many taxpayers are left wondering how to navigate their financial declarations without triggering unwanted scrutiny. This article offers insights into the key factors that might lead to an audit, as well as practical tips on how to present a tax return that minimizes the risk of being flagged.
Recent changes in IRS funding and operational priorities indicate a renewed vigor in the agency’s auditing practices. However, political shifts and leadership changes may complicate the agency’s strategic direction. Experts like Mark Baran from CBIZ’s national tax office emphasize that audits can often stem from easily identifiable areas where discrepancies commonly occur—what they refer to as “low-hanging fruit” for the IRS. These areas are essential for taxpayers to understand in order to fortify their returns against potential audits.
One of the primary triggers for an IRS audit involves discrepancies between reported income and the information available to the IRS from employers and financial institutions. Tax forms such as Form W-2 for regular income, Form 1099-NEC for freelance earnings, and Form 1099-B for investment earnings must align perfectly with the amounts reported by the taxpayer on their return. If these figures don’t match up, the IRS software will flag the return, prompting a closer examination.
Additionally, tax deductions that appear disproportionately high in relation to a taxpayer’s reported income can also raise alarm bells. The IRS utilizes algorithms to analyze tax returns against benchmarks within similar income brackets. For instance, if a taxpayer claims charitable contributions resulting in deductions that account for 30% to 50% of their adjusted gross income, it may warrant additional scrutiny due to its deviation from average deduction patterns.
Another area that attracts a higher-than-usual chance of audits is the Earned Income Tax Credit (EITC). Designed to support low- to moderate-income workers, this credit has a notably increased audit rate—with claimants facing 5.5 times more audits compared to other filers. Confusion surrounding eligibility criteria, which takes into account various factors such as income level, family size, and residency, often leads to improper claims.
Taxiamperts like Robert Nassau from Syracuse University’s low-income tax clinic highlight the complexities involved in EITC claims. This complexity often leads to unintentional mistakes, putting legitimate claimants at risk of being audited as part of broader efforts to curb improper payments under this program.
Despite these red flags, it’s paramount to recognize that audits remain a rarity for average taxpayers. Data from the IRS suggests that, through fiscal year 2023, merely 0.44% of individual returns were subject to examination for tax years ranging from 2013 to 2021. When audits do occur, they are often administrative in nature rather than involving face-to-face discussions—over 77% of audits in recent years were conducted through correspondence, simplifying the taxpayer’s process of dealing with these situations.
Preparation is vital in ensuring one’s tax return is audit-proof. Baran advises that having solid documentation, like receipts and records to substantiate claims, can ease concerns about being audited. Well-documented returns signal to the IRS that the taxpayer is organized and diligent about their financial reporting—traits that the IRS respects and may reduce the likelihood of a thorough review.
In closing, understanding what might trigger an IRS audit can empower taxpayers to file their returns with greater confidence. While the prospect of an audit can be daunting, tracking down missing income, being conservative with high deductions, and ensuring compliance when claiming credits like the EITC can help mitigate risks. Remember, preparation and meticulous record-keeping are your best defenses in the tax filing process. By taking proactive steps to understand the regulatory landscape, taxpayers stand a better chance of navigating tax season smoothly and avoiding unnecessary stress.