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Tax season is underway and there’s been increased scrutiny of the IRS as the agency starts deploying part of the nearly $80 billion approved by Congress in August.
While Treasury Secretary Janet Yellen has shared goals like boosting customer service and improving technology, critics have warned the new funding will spark an uptick in IRS audits.
“People are scared to death of the IRS,” said Karla Dennis, an enrolled agent and founder of Karla Dennis and Associates. “They don’t understand how the system works, and so they’re extremely fearful of audits.”
The IRS audited 3.8 out of every 1,000 returns, or 0.38%, during the fiscal year 2022, down from 0.41% in 2021, according to a recent report from Syracuse University’s Transactional Records Access Clearinghouse.
While IRS audits have been rare, experts say certain moves are more likely to trigger an exam.
4 red flags for an IRS audit
The statute of limitations for an IRS audit is typically three years, with the clock starting once you file, explained John Apisa, a CPA and partner at PKF O’Connor Davies LLP. But there’s no time limit when pursuing tax fraud.
Generally, the agency uses software to compare each return to others with similar income, assigning a numeric score to each one, with higher numbers more likely to trigger an audit.
Some of the red flags that may trigger an audit include:
1. Excessive credits or deductions compared to income
For example, your return may get flagged if you made $100,000 and claimed $70,000 in charitable deductions.
2. Missing income
Your return must reflect what’s been reported by other companies, Apisa said, such as Form 1099-NEC for contract work or Form 1099-B for investment earnings. Wait to file until you have all your documentation in hand, and check to make sure what you entered matches what’s on the forms.
“You have to be careful, even with the simpler stuff,” he said.
3. Refundable credits
The IRS also reviews refundable tax credits more carefully since filers can still receive the tax credit with zero balance due.
While audits have declined overall, the drop is lower for filers claiming the earned income tax credit, a tax break for low to moderate earners, which has contributed to higher audit rates among Black Americans.
4. Round numbers
Deductions with rounded expenses may raise eyebrows, explained Preeti Shah, a certified financial planner and CPA at Enlight Financial in Hamilton, New Jersey.
For example, if a business owner lists exactly $5,000 for advertising, $3,000 for legal expenses and $2,000 for support, “the IRS knows you’re just winging it,” she said.
“Round numbers are a dead giveaway,” Apisa added.
How to protect yourself from a possible audit
While taxpayers may be fearful of an audit, experts say the best protection is staying organized by saving receipts and records to show proof, if needed. “You’re guilty until proven innocent,” Shah said.
And if you’re missing a receipt, copious records may provide a narrative to back up your position, Dennis said. “Document, document, document,” she added.
Source : CNBC
