The 2022 tax season has begun. While preparing your taxes this year, keep in mind that an audit, although unlikely, may happen. An audit by an IRS agent may be unavoidable based on your circumstances, but there are common triggers you can keep in mind to avoid an audit.
Keep reading to learn about some common 2022 IRS audit triggers from our specialists at Levy & Associates Tax Consultants.
What Is an IRS Audit?
If the Internal Revenue Service (IRS) flags something on your tax return, it may decide to proceed with an official review. An IRS agent will look at your tax return, all supporting documentation, and any other financial information needed to ensure the accuracy of your return.
Common 2022 IRS Audit Triggers
Many of these audit triggers are familiar, but the IRS identified others this year due to the increase in remote workers, the rise of cryptocurrencies, and new legislation. Keep these triggers in mind while preparing your taxes in 2022 to help avoid IRS audits.
1. Higher-Than-Average Income
How much you make in a year affects your chances of being audited. If you made less than $200,000, you are not likely to be chosen for an audit because audits occur for fewer than 1% of individual tax returns with income less than $200,000. However, audit rates increase to 10% or more of returns with incomes of $1 million or higher.
2. Unemployment Income
The 2022 Audit Plan mentions unemployment as a specific trigger due to increased unemployment payouts stemming from Covid 19. The IRS is concerned about taxpayers underreporting compensation from unemployment, so receiving unemployment income provides cause for the IRS to flag a tax return.
You are at a higher risk of being audited if you work as an independent contractor or sole proprietor of a business. The IRS is concerned with self-employed taxpayers underreporting income and overreporting expenses, including blending business expenses with personal ones. Avoid this trigger by ensuring that your return matches your records.
4. Round Numbers and Mathematical Errors
Avoid rounding numbers up or down when filing a tax return. Round numbers like $100 stand out and may get flagged. The IRS may also flag your return if the numbers don’t make sense or “add up.” Avoid an audit by using exact numbers and triple-checking your math.
5. Crypto or Digital Currency Transactions
The IRS recognizes the fraud risks associated with virtual currencies and has put data analytics and artificial intelligence in place to ensure compliance.
In 2021, the Infrastructure Investment and Jobs Act established specific requirements for reporting digital assets like cryptocurrencies. If you own Bitcoin, Ethereum, etc., the IRS may flag your return for an audit.
6. Earned Income Tax Credit
The IRS may flag a return claiming the Earned Income Tax Credit (EITC). The IRS has its feelers out for fraud because billions of dollars of EITC claims pay in error. If you claim the EITC, keep documentation that proves your eligibility.
7. Disproportionate Tax Deductions
The IRS flags tax returns with excessive or suspicious deductions. You should always claim all the deductions you can when filing, but the IRS may audit you if you have a higher-than-average number of deductions.
8. Home Office Deductions
With the number of remote workers still growing, home office deductions are among the 2022 IRS audit triggers this year. Wage workers who work from home are typically not eligible for this deduction. Know that your dining room table and the desk in your living room do not qualify.
You must use the office space regularly and only for business purposes. If you believe you qualify, keep clear, supported records of your office expenses.
9. Extraneous Business Deductions
Due to past abuse of such deductions, the IRS pays special attention to business deductions for meals, entertainment, and travel. If you are claiming these types of deductions, keep detailed records that include receipts, lists of others in attendance, and the business purpose of the event.
10. Foreign Assets
Compliance is complicated if you have cash or assets abroad, and an audit could result in civil and criminal penalties. If you have foreign assets, accurately report them using a Foreign Bank Account Report (FBAR). The IRS will flag and audit taxpayers who fail to report or misreport foreign assets.
11. Early Retirement Account Withdrawals
For an early withdrawal from a retirement account to be nontaxable, it must meet specific criteria. You must report the withdrawal to the IRS if it is taxable. For 2022, the IRS has expressed an intention to detect unreported withdrawals that do not meet the exception criteria.
Keep these 2022 IRS audit triggers in mind as you prepare your taxes this year.
Need Help? Contact Our Accounting and Tax Professionals
If the IRS audits you this year, let our tax professionals at Levy & Associates Tax Consultants help. Call us at 800-TAX-LEVY for a free consultation.