In August 2022, Congress approved an $80 billion budget for the IRS, allocating several hundred million specifically for audits. However, the Treasury Department mandated that these audit funds should not be used for investigating small businesses or families earning less than $400,000 annually. This initiative has seen the IRS increase scrutiny on wealthy individuals, but there is still a chance that ordinary citizens could inadvertently become targets for audits.
According to a report by CNBC, the Treasury Inspector General for Tax Administration (TIGTA) suggested that the IRS revisit its methods for calculating audit coverage. The IRS accepted this recommendation, focusing enforcement efforts on high-income individuals, large corporations, and complex partnerships.
The Treasury confirmed that the IRS has already collected $1.3 billion in income taxes from “high-income, high-asset taxpayers.” Treasury Secretary Janet Yellen emphasized in Austin, Texas, that while the average taxpayer struggles to balance their finances, the wealthiest individuals seem able to evade taxes, which she called fundamentally unfair.
The $80 billion budget passed in August also included a directive from the Treasury that prohibited the IRS from using audit funds for small businesses or households earning below the $400,000 threshold.
Recent data indicates that from 2013 to 2021, the IRS conducted random audits on 0.44% of individuals and 0.74% of businesses among all tax returns filed by the end of the 2023 fiscal year. Regardless of whether a taxpayer is wealthy or not, three common tax reporting pitfalls can draw the IRS’s attention.
1. Undeclared Income: Tax expert Eric Hylton notes that revenue from employers and financial institutions is reported directly to the IRS on forms like W-2 and 1099. If the IRS notices discrepancies in these reports, it can easily identify incomplete tax filings and pursue tax recovery.
2. Justification for Deductions: Hylton warns that unusually high deductions can raise red flags. For instance, if someone with a $75,000 annual income claims $15,000 or $20,000 in charitable deductions, it might attract IRS scrutiny. Every deduction claimed must be backed by specific documentation; without adequate proof, the IRS will disallow the deduction.
3. Cryptocurrency Investors Face Increased Enforcement: The IRS released new guidelines on cryptocurrency taxation in July, set to roll out in phases starting in 2026, covering investment activities from 2025. Attorney James Creech from an accounting firm anticipates that the enforcement of these regulations will have significant repercussions.
As the IRS adapts its auditing strategy, ordinary taxpayers must remain vigilant and ensure their filings are accurate, as even unintentional missteps can lead to unwelcome attention from tax authorities.
