The IRS is still in the process of developing strategies to prevent increased audits for taxpayers earning less than $400,000 annually. While the Treasury Inspector General for Tax Administration reported that the IRS has made “limited progress” in this regard, there are certain aspects of tax returns that can attract attention from the IRS, regardless of income level. The recent approval of $80 billion in IRS funding by Congress, with a significant portion earmarked for enforcement, has led to increased focus on compliance. Despite the directive from the U.S. Department of the Treasury prohibiting audits on small businesses or households with income below $400,000, the IRS is working on refining its audit methodology to align with these guidelines.
The IRS has prioritized enforcement actions against higher-income individuals, large corporations, and complex partnerships. The Treasury Department recently announced the recovery of $1.3 billion from “high-income, high-wealth individuals,” emphasizing the importance of holding wealthy taxpayers accountable for their tax obligations. Treasury Secretary Janet Yellen condemned the evasion of taxes by the wealthiest individuals in the country, highlighting the disparity in tax compliance between everyday Americans and affluent taxpayers.
Tax experts have identified several red flags that could trigger an IRS audit, irrespective of income levels. One major concern is the omission of income sources from tax returns. Employers and financial institutions submit information returns like Forms W-2 or 1099 directly to the IRS, making it easier for the agency to identify discrepancies in filings. Failure to report all sources of income can lead to increased scrutiny from the IRS. Additionally, individuals engaged in cryptocurrency transactions must ensure that their income from digital assets is accurately reported, as the IRS has finalized guidelines for taxing cryptocurrency transactions.
Another common trigger for IRS audits is claiming deductions that seem excessive relative to the taxpayer’s income. Taxpayers should exercise caution when claiming large charitable deductions or other tax breaks that could raise suspicions. Detailed documentation is essential to substantiate deductions and credits claimed on tax returns. Without adequate proof, deductions may be disallowed during an audit, leading to additional tax liabilities for the taxpayer.
Despite concerns about potential audits, the likelihood of facing an IRS examination remains low for most taxpayers. Data from the IRS indicates that only a small percentage of individual and corporate tax returns are selected for audits each year. Between 2013 and 2021, the IRS examined just 0.44% of individual returns and 0.74% of corporate returns, highlighting the rarity of audits in the overall tax system. However, taxpayers should still exercise caution and ensure compliance with tax laws to avoid potential audit triggers in their returns.