Photo by Nataliya Vaitkevich
Like it or not, Tax season is here, and with it comes the fear of being audited by the Internal Revenue Service (IRS). While most taxpayers breeze through the filing process without a snag, certain red flags could attract unwanted attention from Uncle Sam. And no one likes to deal with audits.
According to a 2023 report from Syracuse University’s Transactional Records Access Clearinghouse, the IRS conducted audits on 3.8 out of every 1,000 returns, amounting to 0.38% of returns, during fiscal year 2022. This was a decrease from 0.41% in 2021.
These 10 things get Americans busted and flagged for audits by the IRS.
One of the easiest ways to land yourself in hot water with the IRS is by failing to report all your income. Tax forms like Form 1099-NEC for freelance income or Form 1099-B for investment earnings make it easy for the IRS to cross-reference your reported income. Mismatched data is a significant red flag for auditors.
Mark Steber, chief tax information officer at Jackson Hewitt, told CNBC that “mismatched data” is the No. 1 thing that gets taxpayers into trouble. “If you leave stuff off [your return], that could get a question,” he added.
While deductions are a legitimate way to reduce your taxable income, claiming excessive deductions compared to your income level could raise questions at the IRS. Taxpayers should be cautious not to overstate deductions like charitable contributions, as auditors may question their legitimacy.
“You need detailed substantiation,” because if you can’t prove you qualify for a tax break during an audit, you could lose the deduction, Ryan Losi, a certified public accountant and executive vice president of CPA firm Piascik, said to CNBC.
Using round numbers for deductions or expenses could signal to the IRS that you’re estimating and are not providing precise figures.
While the EITC is supposed to be used to help low- to moderate-income workers. Taxpayers claiming the EITC should ensure they meet all eligibility criteria and have proper documentation to support their claim.
Although higher earners are at a higher risk of being audited, individuals claiming the Earned Income Tax Credit (EITC) have an audit rate 5.5 times greater than other U.S. filers, as indicated by the Bipartisan Policy Center. This elevated audit rate is partially attributed to improper payments.
The IRS has ramped up enforcement efforts targeting high-income individuals with back taxes. Taxpayers with total income above $1 million and owe more than $250,000 in recognized tax debt are at increased risk of audit under the High Wealth, High Balance Due Taxpayer Field Initiative.
Large partnerships and pass-through entities are increasingly subject to examination by the IRS, thanks to new tools like AI and data science. Partnerships with large discrepancies in their balance sheets or assets over $10 million are particularly at risk of audit, according to Bloomberg Tax.
The IRS is scrutinizing transactions involving virtual currencies, digital assets, and non-fungible tokens. Make sure to be able to substantiate all transaction information, Bloomberg Tax reported.
Failing to report all income reported on Forms 1099, W-2, or Schedule K-1 could increase your odds of getting audited, according to CNBC.
Business owners should diligently report their income and expenses accurately on Schedule C. Mixing personal and business expenses or claiming excessive deductions could cause an audit by the IRS, noted Bloomberg Tax.
Businesses that handle a lot of cash transactions, such as nail salons or restaurants, are at risk of underreporting income, and thus, the IRS pays closer attention. Also, Bloomberg Tax reported that it’s a no-no to report a hobby as a business.
Photo by Nataliya Vaitkevich: https://www.pexels.com/photo/person-filing-tax-documents-6863323/
