As tax season approaches, an air of apprehension often envelops many American taxpayers. The Internal Revenue Service (IRS) undertakes the substantial task of auditing tax returns, and amidst the fear of being selected for an audit, it’s crucial to comprehend the nuances behind how the IRS operates. With recent enhancements in funding and a commitment to intensifying audits on high-income earners, understanding what triggers these scrutiny measures is more relevant than ever.
The IRS has promised to ramp up audits particularly among the wealthiest taxpayers, indicating a shift toward greater supervision of high-income individuals. However, with changes in leadership and a fluctuating political landscape, clarity surrounding the agency’s future auditing priorities remains murky. Tax experts, such as Mark Baran from CBIZ’s national tax office, highlight that certain claims and deductions can seemingly act as “low-hanging fruit” for the IRS, making it imperative for filers to be conscientious about their reported information.
The infusion of funding into the IRS is intended to enhance its operational capabilities, but amid varying political pressures, the agency’s focus may remain uncertain. This situation accentuates the necessity for taxpayers to stay informed and vigilant about how their tax returns are prepared and presented.
Certain actions or discrepancies on tax returns may raise eyebrows at the IRS. The first and foremost consideration is accuracy. Taxpayers who round off figures or estimate certain expenses are essentially gambling with their financial security. Baran warns that this practice increases the likelihood of being selected for an audit, as the IRS is equipped with algorithms that flag inconsistencies.
One significant source of scrutiny arises from income reporting discrepancies. Employers and financial institutions submit “information returns”—like Form W-2 for wages or 1099 forms for freelance earnings—directly to the IRS. Any mismatch between these forms and the taxpayer’s filed return can potentially trigger an audit. Elizabeth Young, a director at the American Institute of Certified Public Accountants (AICPA), emphasizes that the IRS’s software is designed to cross-reference these forms to detect errors.
Another area that often raises red flags is the proportion of deductions claimed relative to reported income. The IRS employs rigorous algorithms to compare individual tax returns with those of comparable taxpayers, ensuring that claimed tax breaks do not seem excessively high. For example, making charitable deductions that account for a significant portion of one’s income—between 30% to 50%—could very well attract additional scrutiny from tax reviewers.
Furthermore, the Earned Income Tax Credit (EITC), a credit available for low- to moderate-income workers, often finds itself in the crosshairs of IRS audits. Robert Nassau, a law professor at Syracuse University, notes that the complexity surrounding EITC eligibility—dictated by income level, residency status, and family size—can lead to improper claims. The Bipartisan Policy Center highlights that EITC claimants have audit rates 5.5 times higher than the average taxpayer, due to frequent mistakes in eligibility criteria.
Despite the fears that audits instill, it is essential to recognize that they remain relatively infrequent occurrences. According to the IRS Data Book, audits accounted for only 0.44% of individual returns filed for tax years from 2013 to 2021. Furthermore, many audits do not result in face-to-face interactions; they occur as “correspondence audits” via mail, where discrepancies are often addressed simply through additional documentation.
Baran underscores the importance of having thorough documentation, including receipts and records, to substantiate claims made on tax returns. Taxpayers who maintain organized financial records and can readily provide proof of their deductions are less likely to attract undue scrutiny.
Navigating the complexities of tax returns requires diligence and attention to detail. As IRS audit procedures evolve, taxpayers must remain informed about potential triggers that may lead to scrutiny. By ensuring accuracy, being wary of excessive deductions, and maintaining proper documentation, individuals can mitigate the risk of audit and approach tax season with confidence. While the landscape may shift with new leadership and funding changes, an informed taxpayer is the best defense against unexpected tax issues.