Wealth

Don’t risk a tax audit. Here are four reasons the IRS may flag your return

dmphoto | E+ | Getty Images

Tax season is underway, and there’s been increased scrutiny of the IRS as it starts deploying part of the nearly $80 billion in funding approved for the agency by Congress in August. 

While Treasury Secretary Janet Yellen has said goals include 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 the agency is 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 employers and financial institutions, 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, said 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. 

Articles You May Like

Warren Buffett’s Berkshire Hathaway trims its stake in Chinese EV maker BYD to 6.9%
IRS: Taxpayers may avoid a penalty by making a second-quarter estimated payment by June 17
From dying mall brand to Wall Street winner: How Abercrombie & Fitch pulled off retail’s biggest comeback
Maintenance and repair costs can be an unwelcomed surprise for first-time homeowners. Here are some ways to avoid bill shock
GM trims 2024 EV forecast amid slower-than-expected demand

Leave a Reply

Your email address will not be published. Required fields are marked *