IRS Tax Audits: What You Need To Know

Whether or not the Internal Revenue Service (IRS) will audit someone’s tax return is dependent upon the individual taxpayer’s income range and income type, according to Justin Hein, the managing attorney at Roni Deutch, A Professional Tax Corporation. There are a variety of red flags that the IRS uses in order to determine whether an IRS tax audit is warranted.

IRS audit red flags

Hein says that the IRS looks at claimed deductions and credits as well as income when deciding whether IRS tax audits are warranted. Year to year, the IRS will concentrate on a new flavor or area to inspect. The IRS might have an independent goal for that particular flavor, but it’s not a required number.

When there’s a need for the government to collect more money or if there’s a belief that certain taxpayers are skirting their reporting requirements, Congress and the Treasury Department motivate the IRS to conduct audits.

IRS tax audits: Is there a quota?

While there’s no official requirement for the IRS to do a certain number of audits every year, Hein says that they set goals based on the income characteristics of taxpayers nationwide. For taxpayers with a reported income of up to $200,000, it’s very rare to be audited by the IRS; only about 0.4 percent of taxpayers are actually audited by the IRS in this income range. However, 2 percent of taxpayers are audited by the IRS if their income is between $200,000 and $1 million. Individuals with over $1 million in income are looking at a 6.8 percent chance of being audited by the IRS.

What are your chances of getting audited by the IRS more than once?

Unfortunately, if you’re audited by the IRS once, you’re more than likely to audited by the IRS again. If you did something on your tax return which was flagged by the IRS, you’re likely to continue claiming the same credit or deduction again. “The good news,” Hein adds, “is that if you’ve been audited by the IRS two years in a row on the exact same issue, the IRS cannot audit you a third time on the same issue.”

Case Studies: Insights into IRS Tax Audits

Case Study 1: John’s Claimed Deductions

John, a self-employed individual with an income of $180,000, claimed numerous deductions on his tax return. These deductions caught the attention of the IRS, and he was selected for an audit. The IRS scrutinized John’s claimed deductions and requested supporting documentation to verify their legitimacy.

Case Study 2: Sarah’s High Income

Sarah, a successful business owner, reported an income of $1.2 million on her tax return. Due to her high income, Sarah had a 6.8 percent chance of being audited by the IRS. The IRS chose to audit her based on their goal to ensure compliance among high-income taxpayers. Sarah’s audit involved a thorough examination of her financial records and business transactions.

Case Study 3: Repeat Audit Limitation

Mark, a taxpayer who had previously been audited by the IRS, found himself facing a second audit on the same issue. In the previous audit, Mark had claimed a deduction that raised suspicion. The IRS disallowed the deduction and assessed additional taxes. In the subsequent tax year, Mark claimed the same deduction again, which triggered another audit.