There are a lot of things that can trigger an IRS audit. Simply put, the IRS identifies them as red flags because they potentially increase the likelihood of one of two things – you are under-reporting income or over-reporting deductions.
High-Income Taxpayers with Unsettled Debts:
The IRS created the ‘High Wealth, High Balance Due Taxpayer Field Initiative’ to prioritize high-end collections targeting those with over $1 million income and $250,000+ in tax debt.
Partnerships and Pass-Through Entities:
The IRS uses AI to identify possible compliance risks and intensify examinations of large and complex partnership returns covering industries like hedge funds and publicly traded partnerships. These partnerships have an average of over $10 billion in assets.
Transactions Involving Digital Assets:
The IRS is cracking down on transactions involving digital currencies after a reported potential for a 75% non-compliance rate among taxpayers.
Form 1099 and Document Matching Reporting:
Not reporting your entire income greatly increases your odds of getting audited. The IRS compares the amounts submitted on forms like 1099, W-2, and K-1 with the amounts you report on your return.
Profit and Loss in Business (Schedule C):
Taxpayers running businesses should avoid abusing deductions, maintain meticulous records, and allocate personal and business expenses separately to decrease their chances of being audited.
Employer Retention Credit Submissions:
The IRS is taking steps to stop the many abuses of the Employer Retention Credit. They are offering a window where taxpayers who submitted questionable claims can withdraw an ERC claim that hasn’t yet been paid, and/ort a voluntary disclosure program for those who did not meet eligibility requirements and want to repay the funds received.
Gig Work and Side Hustles:
Earnings from side hustles must be reported, emphasizing accurate income reporting and potential self-employment tax payments, whether you received Form 1099 or not.
Home Office Expense Deductions:
Deducting home office expenses requires strict adherence to rules, including dedicated office use, and may necessitate proving expenses in case of an IRS audit.
Distinguishing Business from Hobby:
Writing off expenses for a business is allowable – writing off expenses for a hobby is not. If your business hasn’t shown a profit in at least three out of five years, the IRS will view your business as a hobby. Proper books and records are crucial for businesses to establish legitimacy.
Cash-based businesses, especially those with tips, must maintain diligent record-keeping to avoid IRS scrutiny, including reporting large cash transactions through Form 8300.
Foreign Financial Accounts:
If the IRS suspects that you have $10,000 or more in foreign financial accounts and have not filed a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), or if they believe you reported incorrectly or have misreported values on the FBAR, you may be subject to audit. this will more than likely trigger an audit.
Abusive Tax Scheme Transactions:
The IRS has ongoing investigations meant to identify and halt taxpayers engaging in abusive tax schemes. Emerging scams involve the earned income tax credit, sick leave and family leave as well as false fuel tax credit claims.
An experienced tax professional can navigate the IRS’s rules, statutes, and payment options to help you find the best way to eliminate your tax debt. Take the guesswork out of paying off your debt by speaking with a tax professional today.