Attention FAE Customers:
Please be aware that NASBA credits are awarded based on whether the events are webcast or in-person, as well as on the number of CPE credits.
Please check the event registration page to see if NASBA credits are being awarded for the programs you select.

Six Particular Situations Could Prompt an IRS Audit

S.J. Steinhardt
Published Date:
Mar 13, 2023

Audits are not personal, the IRS emphasizes. They are random—but there are certain inconsistencies in a tax return that the agency’s computer system may focus on, The Washington Post reported.

The Post listed six potential triggers and their reasons.

One is that audits are more likely for those who earn $1 million or more per year. “Field Revenue Agents are focused on high-income individuals and their related entities and, to a lesser degree, large corporate and complex pass-through entities,” the IRS said in a statement issued last year. But, the IRS also audited lower-income taxpayers claiming the Earned Income Tax Credit (EITC) at higher than average rate, the Government Accountability Office (GAO) reported last year. “IRS officials explained that EITC audits require relatively few resources and prevent ineligible taxpayers from receiving the EITC,” the GAO reported at the time.

Another trigger would be discrepancies between what is reported on a Form W-2 or Form 1099 and what the taxpayer reports on his or her return. Discrepancies can generate a proposal to adjust the return, which could result in additional taxes owed or a refund.

Yet another trigger that taxpayers should remember for next year is that the IRS will require third-party payment processors to file Form 1099-K for payments received for goods and services of $600 or more a year. The IRS could generate a CP2000 if there is a discrepancy between what information the IRS has and what is reported on the 1099-K.

Audits may also be triggered by unusual deductions. For example, claiming one quarter of one’s income as charitable deductions would be questioned. 

Taxpayers should also be aware of the difference between a hobby and a legitimate business. Before the Tax Cuts and Jobs Act of 2017, taxpayers could claim hobby expenses—up to the income they generated—as miscellaneous itemized deductions that needed to exceed 2 percent of adjusted gross income. But such deductions are not allowed now, until 2025, when the provision is scheduled to sunset.

Finally, the sixth trigger is improperly claiming business deductions for meals, travel and entertainment. IRS Publication 535 explains legitimate business expenses. It says, "If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income." And any deductions should have appropriate documentation.

Generally, the IRS accepts most returns as filed. The Post suggested reading IRS Publication 556 to understand how examinations work.

Click here to see more of the latest news from the NYSSCPA.