The IRS will inspect returns to ensure that income, expenses, deductions, and credits are accurately reported. If discrepancies are found, the taxpayer may be audited or notified that adjustments have been made that may result in a refund or payment of the required tax.
In fiscal year 2022, the IRS completed 708,309 audits, resulting in nearly $30.2 billion in additional taxes.
Here are five common things How to trigger an audit or the dreaded notice from the IRS.
The IRS' automated processes detect millions of miscalculations on tax returns each year. In fiscal year 2022, the agency issued his nearly 16 million mathematical error notices.
The biggest miscalculation involved the Recovery Rebate Credit, a pandemic-related economic impact payment under the $1.9 trillion American Rescue Plan. The second most common error found was related to the child tax credit.
Mathematical errors may not be subject to audit. However, if a return is selected for manual review, other issues may arise that would trigger an audit.
If you do not declare all your income
The agency's “Automated Underreporter” program If we believe you have not reported it, we may issue you a letter All income. The IRS will compare your return to documents you received from your employer or financial institution, such as his W-2 or 1099. If the information does not match, you may receive a CP2000 notification.
If there is a discrepancy, additional taxes may be due or Refund.
In fiscal year 2022, the IRS processed approximately 1.6 million cases under the automatic understatement program, resulting in more than $8.7 billion in additional tax assessments.
IRS spokesman Eric Smith said the average taxpayer is more likely to receive such a letter or notice of a miscalculation than an audit.
“Fortunately, these notices can often be avoided by filing electronically and with a little forethought,” he says.
My husband and I were once notified as part of the Under Reporter program. It said the IRS had received a 1099 showing $25,000 in income that we had not disclosed on our joint return, and that we owed $12,255 in unpaid taxes, including interest and penalties.
After hyperventilating, I calmed down and wrote a report to find the source of the error. At the media company where I worked in television, there was a glitch in the company's accounting system that resulted in the incorrect generation of my name and Social Security number 1099, which was addressed to a famous music artist. I did. (And, no, I'm not at liberty to publish her name, but she is a member of the Rock and Roll Hall of Fame.)
The company issued a correction 1099 and the issue was resolved approximately two months later.
“When you receive a letter, open it immediately and respond immediately,” Smith says. “Now we can do that easily.”
Now, they often respond by scanning a QR code or uploading the required documents using irs.gov's online document upload tool.
Don't be afraid to contact your agency for help. In fact, the IRS will open 70 taxpayer assistance centers on March 16 from 9 a.m. to 4 p.m. to provide in-person assistance. Special Saturday openings are also planned for April 13th and May 18th.
By the way, significantly under-reporting your income can result in severe penalties. The IRS has the power to punish filers. An accuracy-related penalty equal to 20% of the amount of tax underpayment will be imposed.
unusual deduction
Curious why your return was selected for review?
The IRS states that “returns may be selected based solely on statistical formulas.” “We compare your tax return to a 'baseline' of similar returns.”
If a deduction is allowed, take it. However, deductions that don't match your income can be a red flag. For example, if you declare your income to be $40,000 and you also claim $10,000 in charitable contributions, the IRS may investigate your unusual generosity.
Inflated business deductions
I have attended many entrepreneurial seminars where so-called experts exaggerate the amount of money you can claim as business expenses.
“A common misconception is that you can fully deduct the cost of a vacation just by running a few errands, or that you can fully deduct the cost of a car you use infrequently or only occasionally for business,” Smith says. says. “Neither is true.”
According to IRS Publication 583 (Starting a Business and Keeping Records), “Business expenses must be ordinary and necessary to qualify as a deduction.” “Ordinary expenses are expenses that are common and accepted in your field of business, trade, or profession. Necessary expenses are expenses that are useful and appropriate for your business, trade, or profession. .”
Loss patterns of small and medium enterprises
If you own a business, consult a tax professional and also read IRS Publication 334 (Tax Guide for Small Businesses).
Problems can arise if the IRS asks if you are running a commercial business or something more like a hobby.
“If you are not continuing your business to make a profit, there are limits to the deductions you can take,” the agency said in a publication. “Loss from an activity cannot be used to offset other income.”
