What Causes an IRS Audit?

January 29, 2022 / 10:57 am

Nothing can be more stressful than finding out that the IRS wants to audit your taxes. In recent years the number of IRS audits have been declining. In 2019 only .45% of returns were audited. That's 1 out of every 225. Of those audited, half had been from families that had claimed the earned income tax credit. In 2018 the number of audits was .59%. In 2010 the number was 1.11% The IRS cites the decline due to dwindling funding for enforcement. But that may be changing. President Biden has announced plans for adding an additional $80 billion in funding to the IRS for hiring and training additional enforcement staff and upgrading outdated technology. If this happens expect more audits in the future.

What is an IRS audit? An audit is when the IRS reviews either a personal or organization's accounts and financial information to make sure that everything is being reported correctly according to the tax laws and to verify the amount of tax owed was correct. It taxes a lot of time to compile the documentation that you will need to produce and there is a risk that you may owe more in taxes and penalties as a result. As such it is important to avoid triggering an audit as much as possible.

What triggers an audit? Some returns are chosen at random. There is nothing that you can do to avoid being randomly selected. But there are certain red flags that you can avoid raising to attract the IRS attention. These are:

1. Unreported income. The more sources of income that you have the greater the likelihood that you are missing some income to be reported.

2. Foreign accounts. There are strict reporting requirements for foreign bank accounts. If you have a foreign bank account you will increase the likelihood of an audit.

3. Blurring the lines between personal and business expenses. Business owners sometimes play it fast and loose with what they declare as a personal or business expense. The IRS looks closely at excessive business expenses and tax deductions using occupational codes to measure your expenses against the norm. For instance, they know what a typical business in your industry claims for travel expense, If your business exceeds this amount by 20% you can expect to see an auditor at your door soon.

4.Earning more than $200,000. The higher your income the more complex your return is likely to be, The more complex your return the more likely it is to have triggers in it for an audit.

In 2022there will be backlogs at the IRS which will result in a delay in receiving your tax refunds. The best advice is to file early! why is there a backlog? The IRS entered 2022 with 2.8 million business returns that it still has not reviewed for 2020. In addition to that the IRS still has not processed and reviewed 11.7 million personal returns for 2020. A lack of funding, antiquated technology and the effects of COVID on their staff is to blame.