With the tax season upon us, millions of Americans are diligently preparing their tax returns, hoping to maximize their refunds while minimizing potential scrutiny from the Internal Revenue Service (IRS). However, the prospect of being audited can loom large over the process, especially with recent announcements from the IRS indicating a push to increase auditing of the wealthiest taxpayers. In this article, we will explore the dynamics of IRS audits, common pitfalls that can trigger audits, and strategies taxpayers can adopt to protect themselves.
In recent times, the IRS has received a boost in funding, with plans to more than double audit rates for higher-income individuals. This announcement has understandably raised concerns among taxpayers about whether their claims will be scrutinized more closely. However, the broader implications of these changes remain somewhat murky. As political leadership fluctuates, particularly with a Republican-controlled Congress and White House, the IRS’s future audit priorities are shrouded in uncertainty. Taxpayers must remain informed and vigilant regarding potential audit risks while preparing their returns.
While many assume that only high-income earners experience audits, certain claim practices can expose any taxpayer to increased scrutiny. Tax experts, such as Mark Baran from CBIZ, advise against rounding numbers or estimating expenses. Such practices can mistakenly signal a lack of accuracy or intention to mislead the IRS, thereby increasing one’s chances of being audited. Therefore, meticulous attention to detail is paramount when filing.
Another frequent trigger for audits is income discrepancies. The IRS utilizes “information returns”—tax documents like W-2 forms for wages, and 1099s for self-employment income—to cross-reference reported income against what employers and financial institutions report to them. A mismatch in this data might just land a return on the IRS’s audit list. Therefore, it is crucial that taxpayers ensure all income sources are accurately reported.
The IRS’s algorithms are designed to flag returns that display unusually high deductions in relation to reported income. Returns that boast charitable contributions making up a significant percentage of adjusted gross income can attract red flags. Similarly, taxpayers claiming the Earned Income Tax Credit (EITC), designed to assist low- to moderate-income workers, are also under tangible scrutiny. The EITC has a notably higher audit rate compared to other deductions, partly due to instances of improper claims. According to a report from the Bipartisan Policy Center, claimants of the EITC face an audit risk that is approximately 5.5 times greater than that of average filers.
Despite these red flags, it’s important to recognize that IRS audits are far from common occurrences. Statistics from the IRS Data Book for the fiscal year 2023 indicate that only about 0.44% of individual tax returns from 2013 through 2021 were audited. Most audits, in fact, are conducted through correspondence rather than face-to-face interactions. This means that for filers who maintain accurate records and can substantiate their claims, the audit process may be less daunting than initially perceived.
It’s crucial to collect and maintain comprehensive documentation, including receipts and statements, as evidence to support reported claims. Taxpayers who are organized and forthcoming with their records are often seen as less likely to raise suspicion. As stated by Baran, the IRS recognizes prepare tax filers and can quickly move past them in favor of more erroneous filings.
Managing taxes and potential audits is undoubtedly a complex task, especially as the IRS evolves in response to broader political and fiscal pressures. However, by understanding potential audit triggers, maintaining diligent records, and adhering to proper filing practices, taxpayers can navigate the tax landscape with greater confidence. Ultimately, awareness of the rules combined with a methodical approach will help demystify the audit process and alleviate taxpayer concerns. With thoughtful preparation and a clear understanding of the audit landscape, individuals can successfully maneuver through tax season and beyond.