Tax season has begun, and the IRS is under increasing scrutiny as it begins to deploy some of the almost $80 billion in cash approved by Congress in August.
While Treasury Secretary Janet Yellen has stated that aims include increasing customer service and technology, critics have cautioned that the extra spending will result in an increase in IRS audits.
“People are terrified of the IRS,” Karla Dennis, an enrolled agent and the founder of Karla Dennis and Associates, said. “They don’t understand how the system works, therefore they’re terrified of audits.”
According to a recent analysis from Syracuse University’s Transactional Records Access Clearinghouse, the IRS audited 3.8 out of every 1,000 returns, or 0.38%, for the fiscal year 2022, down from 0.41% in 2021.
While IRS audits have been infrequent, experts believe certain actions are more likely to result in an examination.
4 IRS audit warning signs
According to John Apisa, a CPA and partner at PKF O’Connor Davies LLP, the statute of limitations for an IRS audit is normally three years, with the clock starting the moment you file. When it comes to tax evasion, however, there is no time limit.
In general, the agency compares each return to others with comparable income, awarding it a numeric score, with higher numbers more likely to prompt an audit.
Some red flags that may cause an audit include:
1. Abundant credits or deductions in comparison to income
For example, if you earned $100,000 and claimed $70,000 in charitable deductions, your return may be flagged.
2. Inadequate earnings
According to Apisa, your return must reflect what employers and financial institutions have reported, such as Form 1099-NEC for contract labor or Form 1099-B for investment profits. Wait until you have all of your documentation in hand before filing, and double-check that what you put matches what’s on the forms.
3. Credits that can be refunded
The IRS also scrutinizes refundable tax credits more closely because filers can still receive the tax credit even if they owe no money.
While audits have decreased overall, the drop is lower for filers who claim the earned income tax credit, a tax incentive for low to moderate-income earners that have contributed to greater audit rates among Black Americans.
four. round numbers
Deductions for rounded costs may raise eyebrows, according to Preeti Shah, a certified financial advisor and certified public accountant at Enlight Financial in Hamilton, New Jersey.
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For example, if a business owner reports $5,000 in advertising, $3,000 in legal fees, and $2,000 in assistance, “the IRS knows you’re simply winging it,” she says.
“Round numbers are a dead giveaway,” remarked Apisa.
How to Protect Yourself Against a Potential Audit
While taxpayers may be concerned about an audit, experts say the best defense is to stay organized by saving receipts and records to present proof if necessary. “You’re innocent until proven guilty,” Shah added.
Regarding “false” court papers in a fraud lawsuit, the New York AG will pursue sanctions against Trump and his attorneys.
If you don’t have a receipt, Dennis suggests keeping detailed records to give a narrative to back up your claim. “Document, document, document,” she continued.