As tax season unfolds, taxpayers across the nation find themselves grappling with the complexities of filing their returns. Among the many concerns is the specter of audits from the Internal Revenue Service (IRS). Factors contributing to this anxiety include the IRS’s recent pledge to bolster its audit capabilities, particularly for high-income earners. However, the agency’s trajectory and priorities are in flux, leading to speculation from tax experts about what influences may steer their focus.
The current environment at the IRS is characterized by a significant infusion of funding aimed at reshaping its audit strategies. A key objective is to double audit rates for the wealthiest taxpayers, who have historically been under scrutiny for underreporting income. However, with changing political dynamics and leadership within the agency, the exact implementation and effectiveness of these strategies remain uncertain. Should taxpayers in higher tax brackets be especially vigilant in how they file their returns?
Financial experts, such as Mark Baran from CBIZ, suggest that there are identifiable red flags that may increase the likelihood of an audit. This is compounded by the IRS’s ability to detect discrepancies using sophisticated software that cross-references taxpayer filings with various information returns, which are submitted by employers and financial institutions.
One prevalent concern among taxpayers is that any minor mistakes or poorly supported claims on their tax returns could expose them to a higher audit risk. For example, omitting income derived from freelance work, characterized by the issuance of Form 1099-NEC, or disregarding earnings reported on Form W-2 can result in mismatches that attract IRS attention. Experts underline the importance of maintaining accurate records and ensuring all income sources are declared. As Elizabeth Young from the American Institute of Certified Public Accountants points out, discrepancies detected through information returns can flag taxpayers for audits, emphasizing the importance of thorough record-keeping.
Another area that draws scrutiny is excessively high deductions in relation to reported income, especially for charitable contributions. Baran notes that returns showing charitable deductions between 30% to 50% of adjusted gross income often prompt further examination. This discrepancy arises from the IRS’s utilization of algorithms designed to identify anomalies when juxtaposed with similar income brackets.
Understanding the Earned Income Tax Credit and Its Risks
The Earned Income Tax Credit (EITC) serves as a critical tax incentive for low- to moderate-income workers, providing substantial financial relief. However, it is also a common target for audits, partially because it has a statistically higher audit rate compared to other credits. According to research from the Bipartisan Policy Center, those who claim the EITC have a drastically elevated probability—5.5 times higher—of being audited, often stemming from improper claims due to the credit’s complex eligibility criteria. Taxpayers navigating these waters must be particularly diligent in ensuring that their claims align with IRS stipulations regarding income, dependency status, and residency.
Despite the various triggers that can lead to audits, it’s notable that the actual occurrence of an IRS audit is relatively infrequent. Data from the IRS for the fiscal year 2023 revealed that only 0.44% of individual returns filed between 2013 and 2021 were examined. Among these, a substantial majority—over 77%—were conducted through correspondence, rather than face-to-face meetings. This approach, often described as a “correspondence audit,” allows the IRS to resolve issues via mail, which can alleviate some burdens on both the agency and taxpayers.
Taxpayers should not be paralyzed by fear of audits. Baran reassures that filers with proper documentation and substantiation of their claims generally have little to worry about, as the IRS appreciates thoroughness and transparency. Keeping meticulous records, including receipts and relevant data, can serve as a solid defense in the event of an audit. Ultimately, informed and conscientious tax filing can help mitigate risks and pave the way for a smoother tax season.
While the potential for IRS audits can be daunting, understanding the triggers, maintaining robust documentation, and filing accurately can greatly reduce the chances of facing unnecessary scrutiny. With careful preparation and awareness, taxpayers can navigate the complexities of the tax system more confidently.