IRS Audit Risks: Rising Despite Operational Slowdown

You've likely seen recent headlines:
 “IRS funding slashed.” “Audit rates decreasing.” “Staffing reductions.”

For business owners, investors, or high-income households, this might initially seem like a breather. However, the reality is quite different: the IRS is not easing up but instead being more strategic in their auditing approach.

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The IRS Targets Select Taxpayers

Despite a leaner workforce, the IRS is concentrating its efforts by leveraging technology, prominently featuring the Discriminant Inventory Function System or DIF. This system serves as a sophisticated risk assessment tool, analyzing tax returns by comparing individual data points—such as income, deductions, and expenses—against national averages for similar demographics. Significant deviations increase the taxpayer's DIF score, and consequently, their risk of being audited.

Craving more on DIF? Explore the GAO’s detailed report on IRS audit selection.

Spotlight on Audit Triggers

Operational data and IRS trends highlight several significant audit triggers:

  • Unreported Income – From 1099 earnings to crypto profits or rental income, any income overlooked and not reported can trigger a CP2000 notification.

  • Excessive Deductions Relative to Income – Flagged especially for Schedule C filers; e.g., $75,000 in income versus $40,000 in deductions.

  • Cryptocurrency Transactions – With digital assets under scrutiny, bypassing IRS Form 8949 or failing the crypto checkbox could lead to audits.

  • Recurring Business Losses – Chronic losses might prompt the IRS to reclassify a business as a hobby, removing deductibility.

  • Cash-intensive Businesses – Entities such as restaurants and salons, high in cash activities, face increased risk for unreported earnings.

  • Home Office Deductions – All claims must meet the stringent “exclusive and regular use” standards to avoid flags.

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Digital Focus Doesn’t Equal Reduced Risk

The evolving IRS has transitioned from traditional methods to digital methodologies utilizing robust algorithms. Notices like the CP14 (balance due) or CP2000 (income discrepancy) may arrive well post-filing.

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Often, taxpayers remain unaware of issues until interest and penalties are already accruing.

Proactive Steps to Mitigate Audit Risk

The silver lining? Audits don’t necessitate fear but rather preparation. Consider these measures:

  • Ensure return accuracy and alignment with W-2s, 1099s, and crypto gains reports

  • Maintain meticulous records on deductions, business expenditures, and mileage

  • Address any uncertainties or IRS notices promptly; consult a professional if necessary

  • Understand that audit selection is about identifying patterns, not merely your income bracket

Seeking Expertise for Peace of Mind?

If any elements here resonate personally—or if a perplexing IRS notice has arrived—don’t proceed alone.
Haley Claypool & Associates can assist with reviewing IRS transcripts, clarifying notices, and deciding on necessary actions.

Experience sincere guidance focused on clarifying IRS procedures.

Reach out to us for an expert evaluation of your tax situation. We are committed to offering supportive advice, never judgment.

Have Questions?
Let's talk. We are here to help!
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