Are You a Prime Target for an IRS Audit in 2021?

Under a new Biden administration proposal, the IRS may be significantly increasing its efforts to target delinquent taxpayers in 2021 and beyond. The proposal seeks to raise approximately $700 billion in revenue over the next 10 years by closing the “tax gap,” and this will require the IRS to conduct significantly more audits in the decade to come. So, are you at risk of being audited? In this article, Maryland tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, discusses some of the most common triggers for IRS audits.

Common Issues that Can Lead to IRS Audits for U.S. Taxpayers

There are numerous issues that can lead to IRS audits for U.S. taxpayers. In fact, with the IRS’ increasing reliance on data analytics and automated technologies, virtually any filing mistake has the potential to get caught. But, the IRS prioritizes certain filing mistakes over others, and it looks for a number of red flags when deciding whether to devote resources to an audit.

Some of the most common triggers for IRS audits include:

Reporting Significant Income

The majority of IRS audits target taxpayers with an income of $500,000 or more, and the rate of IRS audits increases significantly for taxpayers that report more than $5 million in income. In general, earning more income translates to owing more taxes (although there are, of course, exceptions), so auditing high-income taxpayers is among the most efficient ways for the IRS to close the tax gap.

Reporting Insignificant Taxable Income

Conversely, reporting insignificant taxable income can also be a red flag for the IRS. Following high-income taxpayers, the group with the next-highest rate of audits is taxpayers who report “no total positive income.” While returns in this category account for “less than 0.5% of the individual filing population,” they account for roughly five percent of all IRS audits conducted.

Failing to Report Income Sources

U.S. taxpayers who fail to report all of their sources of income can expect to hear from the IRS. The IRS is cracking down on taxpayers in this category—including gig economy workers, cryptocurrency investors, and cash-heavy businesses. The IRS can gather information about taxpayers’ income sources through various means; and, if the IRS has evidence of income that a taxpayer hasn’t reported, this is highly likely to trigger an audit.

Claiming Excessive Deductions, Credits or Losses

Claiming excessive deductions, credits or losses in order to reduce taxable income is another common trigger for IRS audits. This includes claiming excessive:

• Business deductions
• Home office deductions
• Charitable deductions
• Conservation easement deductions
• Earned income tax credits
• Business and investment losses

Failing to Report Offshore Assets

The IRS has also placed enhanced emphasis on enforcing U.S. taxpayers’ offshore reporting obligations in recent years. Taxpayers who fail to report their offshore assets on FBARs and IRS Form 8938 can expect to face scrutiny even if they have accurately reported their federal income tax liability.

Request a Consultation with a Maryland Tax Attorney

Are you facing an IRS audit? Or, are you concerned about what might happen if the IRS audits your tax returns? To schedule a confidential consultation with Maryland Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 240-235-5096, email ket@thornlawgroup.com or contact us online today.