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As the IRS targets wealthy Americans for audits, here are red flags for everyday filers

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Quotes from Eric Hylton, Former IRS Commissioner of the Small Business/Self Employed Division; alliantgroup National Director

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Key Points

  • The IRS is working on plans to avoid increased audits on taxpayers making less than $400,000 — but certain areas can invite scrutiny, regardless of income.
  • Some red flags could include unreported income, including cryptocurrency earnings and unreasonable tax breaks.
  • For all returns filed between 2013 and 2021, the IRS examined 0.44% of individual returns and 0.74% of corporate returns as of the end of fiscal 2023, according to the latest Databook.

The IRS is still working on plans to avoid increased audits on taxpayers making less than $400,000 — but certain particulars of your tax return can invite scrutiny, regardless of income level, experts say.

The Treasury Inspector General for Tax Administration, or TIGTA, last week reported the IRS has made “limited progress” in developing the methodology for its audit coverage calculation to comply with a directive from the U.S. Department of the Treasury.

In August 2022, Congress approved $80 billion in IRS funding, including tens of billions earmarked for enforcement. The same month, the Treasury issued a directive to the IRS, saying the funds couldn’t be used for increased audits on small businesses or households earning less than $400,000 annually.

In response, the IRS agreed to TIGTA’s recommendations and plans to document the development of its audit methodology, the report said.

Meanwhile, the IRS has continued to focus enforcement efforts on higher earners, large corporations and complex partnerships. The Treasury Department on Friday announced $1.3 billion has been recovered from “high-income, high-wealth individuals.”

“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,” Treasury Secretary Janet Yellen said Friday at an event in Austin, Texas.

Regardless of your income, here are some red flags for IRS audits, according to tax experts.

It’s easy for IRS to catch missing income

While IRS enforcement is focused on wealthy Americans, everyday taxpayers could still face an audit if they haven’t filed an accurate return, experts say.

One common red flag is missing income. Employers and financial institutions use so-called information returns, such as Forms W-2 or 1099, to report your earnings directly to the IRS. Once the agency has information returns, it can easily flag incomplete filings.

“That has a significant return on investment” for the IRS, according to Eric Hylton, national director of compliance for Alliantgroup and former IRS commissioner for the agency’s small business and self-employed division.

Crypto investors could see enforcement

Crypto investors will also be subject to income reported via information returns.

The IRS finalized cryptocurrency tax guidance in July, which included guidelines for digital asset brokers. Mandatory yearly reporting will phase in starting in 2026, covering activity from 2025.

“Everybody’s been waiting for the tidal wave of this enforcement activity,” James Creech, an attorney and senior manager at accounting firm Baker Tilly, previously told CNBC.

Taxpayers need ‘to support every line item’ Another common audit trigger is unreasonable deductions, said Hylton with alliantgroup.
For example, if you’re making $75,000 per year and claim $15,000 or $20,000 in charitable deductions, that could invite IRS scrutiny, he said.

IRS Commissioner Danny Werfel on taxing the wealthy, restoring fairness and utilizing AI

When claiming a tax break, you need detailed paperwork “to support every line item,” said Hylton said. During an audit, a credit or deduction could be disallowed without proof.

Despite areas of heightened scrutiny, IRS audits are still rare.

For all returns filed between 2013 and 2021, the IRS examined 0.44% of individual returns and 0.74% of corporate returns as of the end of fiscal 2023, according to its latest Databook.

Featured Leadership

Eric Hylton held several prominent positions at the IRS, including serving as Deputy Chief of the Criminal Investigation Division and as CI’s head of International Operations. As National Director of Compliance, Eric employs his years of experience at the IRS to assist alliantgroup’s clients as an ambassador for U.S. small and medium sized businesses (SMBs) and in helping others become tax compliant.

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