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Understanding why the IRS conducts audits can help taxpayers navigate their financial filings more confidently. Below are five key factors that could increase your chances of being audited by the IRS.
1. High Income Levels
Taxpayers earning higher incomes are statistically more likely to face scrutiny from the IRS. According to a report from Intuit in 2024, about 4% of those earning over $200,000 were audited, whereas the audit rate for those earning less than that was closer to 1%. This rate spiked to 12.5% for individuals with incomes exceeding $1 million, indicating that the IRS focuses its resources on high earners, who present significant revenue opportunities.
2. Declaring Charitable Contributions
Claiming charitable deductions on your tax return can also raise a red flag. The IRS looks for alignment between your reported income and your deductions; for instance, it’s unlikely that someone earning $30,000 would make a $15,000 donation to charity.
If your stated contributions seem disproportionate to your income, the IRS may seek verification. It’s essential to keep receipts and ensure that your donations are made to qualified organizations, as informal support to friends or neighbors typically isn’t deductible.
3. Refundable Tax Credits
There are various tax credits available, but it’s important to note that not all credits are created equal. Non-refundable credits can offset your tax liability, without resulting in a payout if the credit exceeds what you owe. Conversely, refundable tax credits—such as the Child Tax Credit and the Earned Income Tax Credit (EITC)—can result in refunds beyond your tax obligation.
The IRS reported that in FY 2023, 33.5% of EITC payments were adjusted due to discrepancies in returns prepared by non-credentialed preparers. Filing for these credits may invite closer examination, so consulting a qualified tax professional is advisable before making claims.
4. The Nature of Your Deductions
The types of deductions claimed can also trigger audits. If your deductions are unusually high compared to others in your income bracket, the IRS may question their validity. Careful documentation is essential to support your claims.
5. Correspondence Audits
Not every audit is a cause for alarm. The majority are conducted via correspondence, often initiated by the IRS through a mailed notice. For example, the IRS might send a Notice CP2000 when they identify discrepancies in your reported income, payments, or deductions. This allows you the chance to clarify the issue by providing the necessary documentation.
Remember to keep your records organized for at least three years after filing, as mandated by the Internal Revenue Code.
Conclusion
Preparing your tax return with care and accuracy can help minimize your chances of being audited. Double-check for potential errors, including numerical mistakes or misplaced decimals, and ensure that personal expenses are appropriately separated from business income, particularly if you are self-employed. By taking these proactive steps, you can navigate your tax obligations with greater confidence.
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