Rosalind Evans
As the IRS continues to target wealthy Americans for audits, everyday taxpayers should be aware of potential red flags that could draw unwanted attention, regardless of their income level. Recent developments indicate that while the IRS is working to avoid increased audits on those making less than $400,000, specific issues can still lead to scrutiny. Understanding these red flags can help you avoid potential problems with the IRS.
The IRS’s Focus on Wealthy Taxpayers
Recent reports highlight the IRS’s focus on high-income earners and large corporations. According to the Treasury Inspector General for Tax Administration (TIGTA), the IRS has made “limited progress” in developing audit coverage methodologies in compliance with directives from the U.S. Department of the Treasury. This is partly due to Congress’s $80 billion funding approval in August 2022, which includes funds earmarked for enforcement but specifically prohibits increased audits on small businesses and households earning less than $400,000 annually.
Despite this, the IRS continues concentrating its enforcement efforts on wealthy individuals and complex partnerships. Treasury Secretary Janet Yellen emphasized this focus: “It’s not right that everyday Americans pay taxes while struggling to make ends meet, but some of the wealthiest in this country have been able to evade payment.”
Common Red Flags That Could Trigger an Audit
While the IRS’s enforcement primarily aims at high-income earners, everyday taxpayers are not immune. Tax experts warn that specific issues on your tax return can still raise red flags:
1. Missing Income: One major red flag is missing income. Employers and financial institutions report earnings directly to the IRS using Forms W-2 or 1099. The IRS can easily flag incomplete filings. Eric Hylton, national director of compliance for Alliantgroup, notes, “That has a significant return on investment” for the IRS.
2. Crypto Investments: With the rise of cryptocurrency, investors should be aware of new enforcement guidelines. The IRS finalized cryptocurrency tax guidance in July, which includes mandatory yearly reporting starting in 2026. James Creech, an attorney at Baker Tilly, said, “Everybody’s been waiting for the tidal wave of this enforcement activity.”
3. Unreasonable Deductions: Another common audit trigger is unreasonable deductions. For instance, claiming excessive charitable deductions relative to your income can prompt IRS scrutiny. Hylton advises that taxpayers must ” support every line item” with detailed paperwork. Without proper documentation, deductions may be disallowed during an audit.
The Rarity of IRS Audits
Despite these potential red flags, it’s worth noting that IRS audits are still relatively rare. According to the IRS’s latest Databook, for returns filed between 2013 and 2021, the agency examined just 0.44% of individual returns and 0.74% of corporate returns by the end of fiscal 2023. This indicates that while being aware of audit triggers is important, the likelihood of being audited remains low.
While the IRS primarily targets high-income earners and complex entities, everyday taxpayers should still be vigilant about potential red flags on their tax returns. Ensuring accurate reporting and proper documentation can help mitigate the risk of an audit.
