Undeclared income… 3 loopholes in tax reporting Ordinary people may also be audited by the IRS
In August 2022, Congress approved an $80 billion budget for the IRS, allocating hundreds of millions specifically for enforcement activities. However, the Treasury Department mandated that the IRS not use these funds to audit small businesses or households earning less than $400,000 annually.
The IRS has made it clear that it will focus its auditing efforts on wealthy individuals, yet everyday taxpayers could still inadvertently fall under scrutiny. According to a recent CNBC report, the Treasury Inspector General for Tax Administration (TIGTA) recommended that the IRS revamp its audit coverage calculations to focus on high-income earners, large corporations, and complex partnerships.
The Treasury confirmed that the IRS has successfully collected $1.3 billion in income taxes from “high-income, high-asset taxpayers.” Treasury Secretary Janet Yellen emphasized during a statement in Austin, Texas, that “ordinary people are struggling to manage their finances while the wealthiest can evade taxes, which is fundamentally unfair.”
From 2013 to 2021, the IRS audited approximately 0.44% of individual taxpayers and 0.74% of businesses out of all tax returns submitted. Regardless of whether someone is wealthy or a regular taxpayer, there are three common pitfalls that could draw the IRS’s attention during audits:
1. **Unreported Income**: Tax expert Eric Hylton points out that employers and financial institutions report income directly to the IRS through forms such as W-2 and 1099. This means the IRS can easily spot incomplete filings, making it straightforward for them to pursue unpaid taxes.
2. **Providing Evidence for Deductions**: Hylton also warns that unusual deductions can raise red flags. For instance, if a taxpayer with a $75,000 annual income claims a $15,000 or $20,000 charitable deduction, the IRS may become suspicious. It’s essential that taxpayers maintain specific documentation for each deduction; lacking proof can lead to disallowed claims.
3. **Crypto Investors Under IRS Scrutiny**: The IRS rolled out new guidance for cryptocurrency reporting in July of this year, with phased implementation starting in 2026, which will cover investments made in 2025. According to attorney James Creech, “Everyone is anticipating the wave of enforcement that will follow the implementation of these regulations.”
As the IRS shifts its focus towards higher-income individuals and complex entities, it becomes crucial for all taxpayers to be diligent in their reporting practices to avoid falling into audit traps.
