Factors that increase your chance of an audit
Q: With the IRS getting billions added to its budget, does that mean the chance of being audited rises substantially?
A:
Most of the enforcement effects from the IRS’ $80 billion windfall won’t be felt by taxpayers for at least a couple of years. And most individual returns will still escape the audit machine.
The bad news is that your chances of an audit escalate, sometimes significantly, depending on various factors. While there’s no sure way to predict an IRS audit, these are red flags that could certainly increase your chances of one:
The IRS gets copies of all the 1099s and W-2s, so be sure you report all required income on your return. IRS computers are pretty good at cross-checking the forms with the income shown on your return.
Failing to report all taxable income.
The Treasury Department and the IRS say that the enforcement funds will be used in part to audit more high-net-worth individuals and pass-through entities, such as LLCs and partnerships. Treasury officials have made a big promise, saying that taxpayers earning under $400,000 won’t see increased audit rates relative to recent years.
Making a lot of money.
You don’t file a tax return. The IRS has been chastised for its yearslong lack of enforcement activity of non-filers. So, it shouldn’t come as a surprise that high-income non-filers now top the list of IRS’ strategic enforcement priorities. The primary emphasis is on individuals who received income above $100,000 but didn’t file a return.
Taking higher-than-average deductions, losses or credits.
If the deductions, losses or credits on your return are disproportionately large compared with your income, the IRS may want to take a second look at your return.
Schedule C is a treasure trove of tax deductions for the self-employed. But it’s also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don’t report all their income.
Running a business. Claiming the American Opportunity Tax Credit.
The AOTC is worth up to $2,500 per student for each of the first four years of college.
The IRS is ramping up its enforcement efforts of the credit, focusing on taxpayers taking the credit for more than four years for the same student, omitting the school’s taxpayer ID number on Form 8863 (the document used to claim the AOTC), taking the credit without receiving Form 1098-T from the school, and claiming multiple tax breaks for the same college expenses.
Taking an early payout from an IRA or 401(k).
Special attention is being given to withdrawals from IRAs, 401(k)s and other workplace retirement plans before age 59 ½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax.
The IRS is on the hunt for taxpayers who sell, receive, trade or otherwise deal in bitcoin or other virtual currency or digital assets. This is part of the IRS’ effort to clamp down on unreported income from these transactions.