What are some of the top IRS audit triggers for 2021? The past few years many sources have reported a reduction in IRS audits. Recently, the IRS has implemented new procedures to step up audits in an effort to increase collections for the US Treasury. Lost revenues associated with past tax cuts, COVID-19 and substantial new spending on issues such as infrastructure must be offset. Congress has applied pressure to the IRS to increase the number of audits and associated revenues.
Here are some of the top IRS audit triggers for 2021 based upon releases by the IRS and industry watchdogs:
Earned Income Above $250,000 – In the past it has been reported that less than 1% of returns with less than $250,000 in income have been audited. While that number increases to almost 10% for those reporting more than $1 million in income, the IRS will be taking a closer look at high income returns.
Unreported Income – The IRS has substantially increased it’s ability to track revenues and transactions from sources such as banking institutions, investment houses and business transactions here in the US and around the globe. While many sources (especially offshore investments) fail to generate a 1099 this does not relieve the burden on US taxpayers to report all income from any source, domestic or international.
Excessive Deductions – always a favorite of the IRS for targeting audits, excessive deductions stick out. The IRS generates a bell curve for every type of legitimate deduction. If your return falls outside of the “norm” it can easily be identified.
Other top IRS audit triggers for 2021 include taxpayer math errors, Schedule C filers with businesses operating primarily on a cash basis, claiming a loss on any hobby, deductions for meals and business expenses such as travel as well as home office deductions.
One interesting addition to the top IRS audit triggers for 2021 involves the Earned Income Tax Credit (EITC). The IRS will be closely scrutinizing returns with EITC credits. Ensure comprehensive documentation to support fulfillment of EITC rules.
The tax preparation, accounting and audit defense services of Allen Barron provide a one-stop solution for complex tax returns. Ask how the additional protections of the attorney-client privilege provide stronger protections against a California or IRS tax audit when compared to returns prepared by a CPA or tax preparation service.