The IRS is currently in the process of avoiding increasing audits on taxpayers who earn less than $400,000 annually. However, regardless of your income level, there are certain aspects of your tax return that can attract scrutiny. While the government has instructed the IRS not to use additional funding for audits on small businesses or households earning below the $400,000 threshold, it is essential to be aware of potential red flags that could result in an audit.
IRS Audit Methodology
The Treasury Inspector General for Tax Administration recently reported that the IRS has made limited progress in developing the methodology required for its audit coverage calculation. Despite the directive from the U.S. Department of the Treasury, the IRS is still working on finalizing this process. This delay in implementing the audit methodology puts taxpayers at risk of facing scrutiny from the IRS.
Focus on High-Income Individuals
Despite the limitations on auditing lower-income taxpayers, the IRS continues to concentrate its enforcement efforts on high-income individuals, large corporations, and complex partnerships. The Treasury Department recently announced that $1.3 billion has been recovered from high-income, high-wealth individuals, highlighting the agency’s efforts to crack down on tax evasion by the wealthy.
One common red flag that could lead to an IRS audit is missing income. Employers and financial institutions provide information returns directly to the IRS, making it easy for the agency to identify inaccuracies in tax filings. Additionally, unreasonable deductions, such as claiming excessively high charitable deductions relative to income, can also raise red flags and prompt an audit.
Crypto investors are also subject to IRS scrutiny, as the agency has finalized cryptocurrency tax guidance that includes reporting requirements for digital asset brokers. Starting in 2026, mandatory yearly reporting will be phased in, covering cryptocurrency activity from 2025. This increased focus on crypto transactions means that investors must ensure accurate reporting to avoid triggering an IRS audit.
Audit Statistics
While the prospect of an IRS audit can be daunting, it is essential to note that audits are still relatively rare. Between 2013 and 2021, the IRS examined only 0.44% of individual returns and 0.74% of corporate returns. Despite the low audit rates, taxpayers should remain vigilant and ensure that their tax returns are accurate and supported by proper documentation.
While the IRS is currently working to avoid increased audits on lower-income taxpayers, it is crucial for all taxpayers to be aware of potential audit triggers. By understanding the red flags that can invite scrutiny from the IRS, individuals and businesses can take steps to minimize their risk of facing an audit. Proper record-keeping, accurate reporting, and compliance with tax regulations are essential to avoid unwanted attention from the IRS and ensure a smooth tax filing process.
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