Tax season can be a stressful time for many Americans, especially when it comes to the possibility of being audited by the IRS. While the IRS is still finalizing plans to avoid increased audits on taxpayers making less than $400,000, there are certain factors in your tax return that could still trigger scrutiny from the agency, regardless of your income level. Understanding these red flags can help you prepare for tax season and potentially avoid an audit.
IRS Audit Methodology and Funding
The IRS has been working on developing the methodology for its audit coverage calculation to comply with a directive from the U.S. Department of the Treasury. Despite Congress approving $80 billion in IRS funding, with restrictions on increased audits for small businesses or households earning less than $400,000 annually, the agency has made limited progress in this area. However, the Treasury Inspector General for Tax Administration reported that the IRS has agreed to document the development of its audit methodology in response to their recommendations.
Focus on Higher Earners
While the IRS is not currently targeting small businesses or lower-income households for audits, the agency has continued to focus its enforcement efforts on higher earners, large corporations, and complex partnerships. The Treasury Department recently announced that $1.3 billion has been recovered from high-income individuals, highlighting the ongoing efforts to ensure that all taxpayers are paying their fair share.
Regardless of your income level, there are certain red flags that could trigger an audit from the IRS. One common red flag is missing income, as the agency receives information returns from employers and financial institutions that report your earnings directly to the IRS. Another common trigger is unreasonable deductions, such as claiming high charitable deductions relative to your income. It’s important to keep detailed records to support any tax breaks you claim to avoid scrutiny during an audit.
Cryptocurrency investors are also subject to IRS scrutiny, as the agency has finalized tax guidance for digital asset brokers. Mandatory yearly reporting for crypto transactions will phase in starting in 2026, covering activity from 2025. This increased focus on cryptocurrency transactions means that investors need to ensure they are accurately reporting their gains and losses to avoid potential audits from the IRS.
While IRS audits are still rare, it’s essential to be aware of the red flags that could trigger scrutiny from the agency. By understanding the IRS’s focus areas and ensuring that your tax return is accurate and well-documented, you can minimize the risk of being audited and navigate tax season with confidence. Remember to consult with tax experts or accountants if you have any concerns about your tax return to avoid potential issues with the IRS in the future.