As taxpayers prepare to file their returns, concerns about the potential for IRS audits are prevalent. Following a significant funding increase, the IRS plans to more than double its audit rate for high-income earners. However, the agency's future auditing priorities may be influenced by changes in leadership and a Republican-controlled Congress.
Tax experts identify several common factors that could raise red flags for an audit. One major concern is underreported income, which the IRS detects through "information returns" such as Form W-2 for wages and 1099 forms for contract work. Discrepancies between these forms and what taxpayers report can trigger audits.
Another area of scrutiny involves high deductions relative to income. The IRS utilizes algorithms to compare individual returns against averages for similar tax brackets. For instance, a charitable deduction that constitutes a significant percentage of adjusted gross income could attract attention.
Additionally, the Earned Income Tax Credit (EITC), a refundable tax credit for low- to moderate-income workers, is frequently targeted. Due to the complexities surrounding eligibility criteria, including earnings and family size, improper claims can lead to higher audit rates for EITC recipients compared to the broader population.
Despite these concerns, the likelihood of an audit remains low. In fiscal year 2023, only 0.44% of individual returns were examined. Most audits are conducted via correspondence, with filers encouraged to maintain thorough documentation to support their claims. Having adequate receipts and records can help alleviate concerns, as the IRS typically moves on from well-prepared taxpayers.