As taxpayers nationwide submit their returns, a looming concern for many is that certain claims might heighten their odds of an IRS audit. With a substantial boost in funding, the IRS has declared its intention to dramatically increase the audit rate for the wealthiest individuals. However, with shifting leadership and the dynamics of a Republican-led Congress and White House, the agency’s future focus remains somewhat uncertain.
Mark Baran, a managing director at CBIZ’s national tax office, points out that there are always areas that the IRS might prioritize as easier targets.
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No matter what you earn, it’s crucial not to round figures or guesstimate expenses on your return, warns Baran. “It’s akin to playing the audit lottery and elevating your risk,” he adds.
Let’s delve into some IRS audit triggers that tax experts often highlight.
### Underreported Income
The IRS frequently detects unreported income through “information returns,” which are tax documents submitted by employers and financial institutions to both taxpayers and the IRS. This might involve documents like Form W-2 for salary, 1099-NEC for freelance or gig work, or 1099-B for investment gains. IRS software checks these forms against your submitted return, flagging discrepancies for a possible audit, explains Elizabeth Young from the American Institute of Certified Public Accountants (AICPA).
### High Deductions Compared to Earnings
According to Baran, excessively high deductions relative to your income can draw scrutiny. The IRS utilizes a program that benchmarks your return against others in a similar tax bracket, using an algorithm to identify when deductions seem disproportionately large. For instance, if your charitable contributions range from 30% to 50% of your adjusted gross income, that might attract further inspection from the IRS, Baran notes.
### Earned Income Tax Credit
The earned income tax credit (EITC), a refundable credit aimed at low- to moderate-income earners, often comes under the microscope. Robert Nassau, a law professor at Syracuse University, mentions that there are cases of improper claims due to the credit’s complex eligibility criteria, which consider factors like earnings, residency, and family size. Though high earners generally face more audits, EITC claimants encounter a 5.5 times greater audit rate compared to other filers, partly due to incorrect payments, as reported by the Bipartisan Policy Center.
### ‘Substantiation’ Can Protect from Audits
Despite these red flags, IRS audits remain relatively infrequent. According to the recent IRS Data Book, just 0.44% of individual tax returns from 2013 to 2021 underwent audits through fiscal year 2023. Mistakes or unintentional omissions often lead to “correspondence audits,” which are handled through mail, explains Baran. In fiscal 2023, over 77% of audits were managed this way, with the rest as in-person “field” audits.
Regardless of the method, having proper documentation means filers shouldn’t worry, Baran advises. Maintaining receipts and relevant records to substantiate claims is vital. “The IRS recognizes when someone is well-prepared, and they prefer to move on,” he concludes.
