The IRS audits people to see if they reported their taxes accurately and, if they didn't, to determine if they owe more taxes. Audit trends vary depending on taxpayer incomes. The IRS receives and processes most tax returns without further examination. However, there are a variety of factors that can attract the attention of the IRS and increase the chances that the return will be audited through a correspondence examination or assigned to an auditor for further consultation.
According to the TRAC, more than half of the correspondence audits initiated by the IRS last year involved low-income people who applied for the Earned Income Tax Credit (EITC). The IRS fully appreciates the importance of the refundable EITC and the big difference it makes for individuals. Still, focusing on auditing low-wage workers raises the question of efficiency and fairness, Long said. And other virtual currencies are gaining in popularity, with one common feature: the absence of the same level of government control that occurs with regular tangible currency.
Typical audits for higher-income taxpayers involve at least three different tax years, often include related entities, and generally take years to resolve. Taxes are one of the certainties of life, but nowadays it's less and less certain that the IRS will audit them. This group is likely to receive W2 forms from their employers, data that the IRS can verify, and is based on the standard deduction rather than on the itemization, which reduces the possibility of falsifying some deductions. Taxpayers who undergo a mail audit often can't contact a single point of contact when they call the IRS for answers or to locate the information they sent to the agency, Collins wrote.
That idea was at the heart of the Biden administration's Build Back Better plan, which would have been funded in part by strengthening tax enforcement in the IRS. According to tax experts, this increases the IRS's interest in examining the returns of low-wage workers for errors. Taxpayers often believe that if they work from home, they can automatically deduct expenses related to the business use of their home space. The reason is the increase in what is known as correspondence audits, a review of a tax return that is normally processed by the IRS through letters and phone calls, as opposed to in-person audits, which tend to be more complex.
It may seem counterintuitive that low-income households are more likely to be audited than some wealthier taxpayers, but that's because the IRS checks for fraud and errors related to the earned income tax credit, says Eric Bronnenkant, tax director at the financial services firm Betterment. It's important to look at the percentage of taxpayers audited in each income category and not just the number of audits in each income category. There is an explanation why returns that claim the EITC are more likely to cause an audit than other tax returns.
