As tax season begins, there are concerns among Americans about the possibility of IRS audits due to the agency’s focus on improving service, technology, and enforcement.
The IRS has been focusing its enforcement efforts on individuals with high incomes, as well as large corporations and complex partnerships.
However, experts warn that everyday filers may still be subject to an audit, with certain issues being more likely to attract the attention of the IRS.
According to Ryan Losi, a certified public accountant and executive vice president of CPA firm Piascik, it is important to avoid the risks associated with the “audit lottery.”
A recent report from the Government Accountability Office reveals a decrease in audit rates for individual income tax returns across all income levels from 2010 to 2019.
The decline, attributed mainly to reduced IRS funding, reflects a drop from 0.41% in 2021 to 0.38% in fiscal year 2022, according to a Syracuse University report.
Despite this overall trend, experts in taxation are warning against developing a misguided sense of security when it comes to the risk of personal audits.
Mark Steber, the Chief Tax Information Officer at Jackson Hewitt, points out a number of indicators that taxpayers should be cautious of when it comes to IRS audits.
One significant concern is missing income, easily detectable by the IRS through information returns provided by employers and financial institutions. Mismatched data is identified as the top issue leading to potential audit inquiries.
Tax Red Flags
Unreasonable tax breaks, such as excessive deductions compared to income levels, are another red flag.
Taxpayers claiming deductions disproportionate to their earnings may face scrutiny, emphasizing the need for detailed substantiation during audits.
Accuracy in reporting is emphasized, discouraging the use of round numbers for deductions, which could trigger increased audit scrutiny.
Tax experts suggest using actual expenses rather than estimates to avoid being part of the audit selection.
The Earned Income Tax Credit (EITC), designed for low- to moderate-income workers, has historically faced scrutiny due to its complex nature and a high rate of improper payments.
While higher earners are more likely to face audits, EITC claimants experience a 5.5 times higher audit rate than other US filers.
Despite this, the IRS plans to reduce correspondence audits for EITC claimants starting in fiscal 2024.
As audit rates fluctuate, taxpayers are urged to remain vigilant and ensure accuracy in their filings to avoid potential red flags that could lead to IRS scrutiny.
