July 18, 2024

 

The tax season of 2022 has begun. While preparing your taxes this year, keep in mind that, while unlikely, an audit may occur. Based on your circumstances, an IRS audit may be unavoidable, but there are several frequent triggers to be aware of in order to avoid an audit.

Continue reading to learn about some typical IRS audit triggers in 2022 from Levy & Associates Tax Consultants’ experts.

What Is an IRS Audit and How Does It Work?

The Internal Revenue Service (IRS) may decide to conduct an official review if something on your tax return is flagged. To guarantee the accuracy of your return, an IRS agent will examine your tax return, including supporting paperwork, and any additional financial information.

IRS Audit Triggers in 2022

Many of these audit triggers are well-known, but the IRS uncovered new ones this year as a result of the emergence of cryptocurrencies, as well as new legislation. To avoid IRS audits in 2022, keep these triggers in mind when completing your taxes.

  1. Earnings that are higher than the national average

Your odds of getting audited are influenced by your annual income. If you earned less than $200,000, you are unlikely to be audited because audits are conducted on less than 1% of individual tax returns with income under $200,000. With incomes of $1 million or more, however, audit rates rise to 10% or more of returns.

  1. Unemployment Compensation

Due to increasing unemployment compensation as a result of Covid 19, the 2022 Audit Plan specifies unemployment as a specific trigger. Because the IRS is worried about individuals underreporting unemployment benefits, collecting unemployment income might cause a tax return to be flagged.

  1. Self-Employment is the third option.

Working as an independent contractor or sole proprietor of a firm puts you at a higher risk of getting audited. Self-employed taxpayers who underreport income and overreport costs, including combining business and personal spending, are a source of worry for the IRS. Ensure that your return matches your records to avoid this trigger.

  1. Mathematical Errors and Round Numbers

When submitting a tax return, avoid rounding figures up or down. Round figures, such as $100, stand out and are likely to be detected. If the numbers don’t add up or make sense, the IRS may flag your return. Use exact amounts and triple-check your math to avoid an audit.

  1. Transactions with Crypto or Digital Currency

 

The IRS is aware of the potential for fraud with virtual currencies and has implemented data analytics and artificial intelligence to ensure compliance.

The Infrastructure Investment and Jobs Act of 2021 created particular reporting rules for digital assets such as cryptocurrencies. The IRS may flag your return for audit if you own Bitcoin, Ethereum, or other cryptocurrencies.

  1. Earned Income Tax Credit (EITC)

A return claiming the Earned Income Tax Credit may be flagged by the IRS (EITC). Because billions of dollars in EITC claims are paid in error, the IRS is on the lookout for fraud. Keep evidence that demonstrates your eligibility if you claim the EITC.

  1. Inequitable Tax Deductions

Excessive or questionable deductions are flagged by the IRS. When submitting your taxes, you should always claim as many deductions as possible; however, if you have a higher-than-average amount of deductions, the IRS may audit you.

  1. Deductions for Home Office

Home office deductions are one of the IRS audit triggers for 2022, as the number of remote workers continues to rise. This deduction is usually not available to wage workers who work from home. You should be aware that your dining room table and your living room workstation do not qualify.

The office space must be used on a regular basis and solely for commercial purposes. Keep detailed, well-documented records of your office expenses if you believe you qualify.

  1. Unnecessary Business Deductions

The IRS pays special attention to corporate deductions for meals, entertainment, and travel because of prior abuses. Keep precise records, including receipts, lists of others in attendance, and the event’s commercial purpose, if you’re claiming these types of deductions.

  1. Foreign Assets (nine)

If you have funds or assets in another country, compliance can be difficult, and an audit might result in civil and criminal fines. If you have foreign assets, use a Foreign Bank Account Disclose to appropriately report them (FBAR). Taxpayers who fail to register or misreport foreign assets will be flagged and audited by the IRS.

  1. Withdrawals from an early retirement account (#11)

An early withdrawal from a retirement account must meet certain criteria in order to be tax-free. If the withdrawal is taxable, you must report it to the IRS. The IRS has stated that they intend to discover unreported withdrawals that do not fit the exemption conditions by 2022.

As you prepare your taxes this year, keep these IRS audit triggers in mind.