While the IRS is battling a decline in both staffing and resources – which has led to a reduction in the number of returns it examines – the tax agency will still target certain taxpayers if their documents contain certain red flags.
Although taxpayers with incomes in excess of $1 million are more likely to be audited, there are a number of ways taxpayers across all income levels can decrease their chances of being screened.
The best way to lower your probability? Blend in.
“The IRS uses its examination process to gather data on what is reasonable for certain taxpayers in different income categories,” Steve Grove, tax managing director at financial services firm CBIZ MHM, told FOX Business. “When you’re outside the norms that increases your chance of examination.”
The IRS will flag returns with deductions that don't make sense, Grove said. For example, a person that reports $600 worth of income but had a $16,000 expense for an office.
The agency may also initiate contact with taxpayers who forget to report items that are automatically reported to the IRS, like pension plan distributions, or those who make very large charitable contributions, Grove said.
You can remain under the radar by making sure your facts are accurate – that means double-checking your math, making sure your forms match your returns and making sure you entered the correct information for things like Social Security numbers. It also means filing on time.
The more complicated your return – and the higher up you are on the income scale – the more imperative it is that you make sure you have completed your forms properly and accurately.
If you realize you made a mistake, you can always file an amended return. That’s something that can be useful for people who may not have received their W-2 forms on time.
The Tax Cuts and Jobs Act changed the way a lot of people file – thanks to a much larger standard deduction, fewer people are itemizing. That means the focus of IRS audits may change, E. Martin Davidoff, national managing partner of the tax controversy practice at Prager Metis, told FOX Business. It may, for example, choose to allocate more resources to examine businesses.
“Miscellaneous itemized deductions were misused a lot,” Davidoff explained.
Davidoff noted that he thinks the number of audits have declined overall, consistent with IRS data. However, they still occur at a high percentage for people with higher incomes, who are making money through partnerships, Schedule Cs, rental properties and other complex deductions.
On the other hand, Grove said that the number of notices the agency is sending out appears to be increasing. Correspondence audits are not only cheaper, but they take much less time for IRS workers to carry out.
Another reason taxpayers are likely to receive correspondence from the IRS is if they claimed the Earned Income Tax Credit. That’s because the tax credit is complicated to administer, according to the IRS, and can lead to massive overpayments.
The IRS recently revealed that it audited just 0.45 percent of individual returns in fiscal 2019. As previously reported by FOX Business, the IRS audited 0.59 percent of individual tax returns, or about 892,000 returns, in fiscal 2018 – fewer than the year prior when audits were at their lowest level since 2002. Rates for high-income earners (with adjusted gross income exceeding $10 million) fell to 6.66 percent, from more than 14 percent the year prior. That is the lowest level since at least 2008 when the tax agency began reporting the data.
The agency’s budget fell by about $2.6 billion between fiscal 2011 through 2019. Its 2019 budget was smaller than its fiscal 2000 budget when inflation is factored in, the Government Accountability Office (GAO) wrote in a report. At the same time, staffing has been reduced by nearly 30,000 positions over the same time period. That loss in staffing is “directly” correlated with a “steady decline in the number of individual audits.”
The IRS has fewer auditors now than at any point since World War II.