IRS Payments Fell Short by $688 Billion: 10 Ways To Avoid an Audit
Some people aren’t paying their taxes. According to the Internal Revenue Service, the tax gap for the 2021 tax year increased to $688 billion. This was more than $138 billion higher than the 2017 through 2019 tax years, so the IRS plans to double down on its efforts to close the tax gap.
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Are you going to be affected by the agency’s auditing sweep? Keep reading to find out your chances of being audited and what you can do to avoid one.
How Does the IRS Choose Whom to Audit?
Your chances of being audited are low. In 2022, the IRS audited only 626,204 out of 164 million returns. That’s an audit rate of less than 0.4%.
However, because of the widening tax gap, the IRS may be auditing a higher number of taxpayers this year. In particular, the agency aims to direct increasing scrutiny toward high-income, high-wealth individuals.
That doesn’t mean you’re off the hook if you don’t belong in that category; it just means that more people overall may get audited in 2024. According to the IRS, its auditing choices depend on statistical formulas and random selections. So whether you make a lot of money or earn the minimum wage, you still have a chance of getting audited.
10 Ways To Avoid an Audit
There’s no guaranteed way to avoid an IRS audit. But following these recommendations will help you steer clear of discrepancies that can lead to your account being flagged for a closer look:
Be honest. The No. 1 piece of advice is to report all of your income honestly, including capital gains, and be accurate with your tax deductions and claimed expenses, which can result in a larger refund. It may seem like an obvious tip, but staying truthful from the beginning will make any potential audit much easier to resolve.
Accurately report your income. Don’t estimate; calculate. The IRS will receive wage information from your employer and financial institutions, so you may be flagged for an audit if the numbers don’t add up. This is especially true for high-income individuals as the IRS steps up its auditing of higher tax brackets in 2024.
Don’t abuse the Earned Income Tax Credit. The IRS audits tax returns that claim the Earned Income Tax Credit more frequently than any other type of return. So before claiming this credit, ensure that you really do meet the relevant income requirements.
Follow the rules for foreign accounts. Offshore accounts may come under additional scrutiny, so be sure to disclose all of your financial holdings regardless of where they’re located.
Be careful with what you claim as a business expense. The IRS uses industry benchmarks to evaluate what’s reasonable when it comes to business expenses and examines any returns that fall far enough outside the lines. This means you should be careful about using a business vehicle for personal trips and with what you claim as a home office expense.
Report income from gigs and side hustles. Engaging in for-profit business activities outside of a salaried position may count as independent contractor work and is subject to reporting requirements.
Determine whether your hobby is actually a business. You may have a hobby that you enjoy doing recreationally, but it may also make you money. Read up on how the IRS distinguishes between a hobby and a business, and report your income accordingly.
Don’t forget to report earnings from cryptocurrency. Many people mistakenly believe that crypto profits aren’t taxed like other forms of income. While that may have been true in the early days of digital currency, most cryptocurrency exchanges now comply with the government’s reporting requirements.
Value your assets appropriately. The IRS has valuation experts who examine whether you’ve correctly reported the value of assets like real estate or works of art. Ensure that you get multiple qualified appraisals for any high-value assets before submitting your tax return.
Don’t falsely claim dependents. You can’t claim a dependent if they’re already being claimed on another return. For example, both parents can’t claim the same child as a dependent if they’re filing separately.
What Happens If You Do Get Audited?
If your account is selected for an audit, here’s a basic overview of what happens:
You’ll receive a notification from the IRS by mail. The agency will never contact you by phone.
Your audit may be managed by mail or through an in-person interview to review your records. This could take place in an IRS office, your home or your place of business.
You’ll need to provide a list of documents specified by the IRS. Remember, you’re required by law to keep all of the records you used when preparing your tax return for at least three years after filing.
If you can prove that your taxes were filed correctly, there will be no further action.
If you agree with the audit’s findings, you may have to make an IRS payment.
If you disagree with the findings, you can request additional mediation or file an appeal.
Don’t panic if you’re selected for an audit. Simply follow the official procedures and consider seeking professional advice for how to handle an audit.
Key Takeaways
While getting audited is a relatively rare occurrence, it’s possible that the IRS will conduct them more frequently to close the widening tax gap. The best course of action is to honestly report your income and keep good records of all your financial documents. That way, if you do end up receiving an audit notice in the mail, you can approach the situation calmly and confidently.
This article originally appeared on GOBankingRates.com: IRS Payments Fell Short by $688 Billion: 10 Ways To Avoid an Audit
