Four Major Red Flags That Can Trigger an IRS Audit

by | Apr 6, 2022 | Blog | 0 comments

The chance of the IRS auditing your returns is slim. A recent Treasury Department Report shows that IRS only audited 0.45% of individual returns in the 2019 fiscal year. Almost half of these returns are for filers that claimed the Earned Income Tax Credit.

According to the Congressional Budget Office, the IRS budget and personnel have decreased by 20% and 20,000, respectively. This has led to a decline in audits.

However, the Biden administration plans to give an extra $80B to help the IRS crackdown on tax cheats. Republican lawmakers claim this move will add 1.2 million audits each year and be a nightmare for families.

The IRS will review more financial records to ensure everything is reported correctly according to tax laws and verify the declared tax amount is correct.

The IRS can select returns for auditing randomly based on a statistical formula and compare them against similar returns’ norms.

Four major red flags can also trigger an IRS audit:

  1. Not reporting all your income: The IRS has received additional information from third parties — not only from 1099s, brokerage statement information, and W2s but also from flow through organizations over the years. The computer system analyzes and compares this information with the returns. It generates a bill where there’s a mismatch.
  2. Breaking foreign account rules: Foreign bank accounts have strict reporting requirements under the Foreign Account Tax Compliance Act. The law requires foreign banks to identify all American asset holders to ensure they report foreign assets worth $50,000 and above on Form 8938. A mismatch between these lists and your returns can trigger an audit.
  3. Blurring business expenses lines: The IRS examines excessive business tax deductions with occupation codes to measure typical travels by profession. A tax return showing a 20% and above deviation from the norm can warrant a second look.
  4. Earning over $200,000: Higher incomes can have more complex tax obligations that often contain audit triggers. The IRS also wants to maximize its returns.

Tax Code 7701 makes benefits to individuals tax-exempt. This code can help you protect your wealth from the federal government and increase your retirement savings. TetonPines Financial can provide clarity and honest guidance on your financial portfolio to help you reach your goals. Schedule a call to get expert portfolio advice.