IRS Audit Surge and TOP Triggers: You Might Be The TARGET

Understanding IRS Audit Rates and Top Triggers for an Audit

The recent influx of new funding for the IRS is poised to increase audit rates. Currently, the IRS audit rate stands at under 1%. While this might sound reassuring, it’s important to understand the potential costs associated with an IRS audit. An audit can cost you tens of thousands of dollars, not to mention the time, stress, and aggravation involved.

According to the IRS, their new strategic plan focuses on increasing audit efforts for high-income earners—those making over $400,000 annually. This plan comes on the heels of the IRS receiving $60 billion in new funding authorized by the Treasury Department.

However, I have my doubts that the IRS will limit their audits to high-income earners in the near term. Here’s why: the IRS is in the process of hiring around 87,000 new employees, some of whom will be tasked with handling audits for wealthy taxpayers. But think about this: would someone new, with limited experience, be capable of successfully auditing wealthy taxpayers right from the start? No, they need experience, they need to learn the tax laws, and they need expertise in the auditing process. In other words, these new IRS agents will need to cut their teeth on auditing people like you and me.

Let’s dive into some of the realities of IRS audits and the top triggers that could lead to one.

Current IRS Audit Rates

The table below shows the IRS audit rates for different income ranges, based on data from the IRS Data Book (2022) and courtesy of nolo.com:

Interestingly, even millionaires are being audited less frequently now. From 2019 to 2022, only 0.4% of taxpayers earning between $1 million and $5 million were audited. This is the lowest audit rate for millionaires since the IRS started tracking this data in 2004.

With the IRS’s new strategic plan and their $60 billion in new funding, they promise to step up enforcement on high-income and high-wealth individuals to ensure they’re paying their fair share of taxes. The plan also assures that audit rates for small businesses and people making less than $400,000 will not increase. However, I remain skeptical, and only time will tell if this holds true.

Top Triggers for an IRS Audit

The IRS uses advanced computer algorithms to decide which returns to audit. If your return looks a bit off, your chances of being audited can go up. Here are seven common reasons why the IRS might audit you:

1. Large Deductions: If you claim unusually large deductions compared to your income, that’s a big red flag. For example, earning $50,000 and claiming $25,000 in deductions will definitely get their attention.

2. Business Losses: Repeatedly showing business losses can make the IRS suspect that you’re not reporting all your income or that you have a hobby rather than a legitimate business.

3. Not Reporting All Income: The IRS matches what you report with W-2s and 1099s. If there’s a mismatch, they’ll notice.

4. Sloppy Returns: Missing schedules, math mistakes, or using round numbers can increase your audit chances. Estimating rather than using actual numbers is also problematic.

5. Foreign Accounts: Having money in foreign banks or financial accounts can raise your audit risk. These accounts need to be disclosed properly.

6. Digital Assets: Owning cryptocurrencies like Bitcoin can increase your audit risk. The IRS asks about this on Form 1040 and has introduced Form 1099-DA for reporting digital asset transactions.

7. High Charitable Contributions: Claiming significant charitable donations, especially without proper documentation, will likely attract IRS scrutiny. Attach a copy of the contribution receipt to your tax return to be safe.

Conclusion

These are some of the main reasons the IRS might decide to audit you. It’s always best to keep thorough records and ensure your return is accurate to avoid any issues. With the IRS planning to hire thousands of new agents, your audit chances may have just gone up.

If you need help with an IRS audit, feel free to reach out. I’ll assist if I can or connect you with someone in my network. I hope you found this blog post helpful. Don’t forget to share this information with anyone who might benefit from it.

Stay informed and vigilant with your taxes to avoid the costly and stressful experience of an IRS audit.