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The idea of a tax audit is scary. Read on to see why you need not fret over one.
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The IRS audits under 1% of the tax returns it receives every year. Due to limited capacity, the agency can’t conduct audits to the extent it may want to.
That may be changing this year, though. The IRS has been granted $80 billion in funding as part of the Inflation Reduction Act. Part of that money is going to be earmarked for enforcement, otherwise known as audits.
As such, you may be worried about having your taxes audited in 2024. But in reality, you probably don’t need to be concerned unless you’re a higher earner. And even then, there’s a really easy way to avoid having your return audited.
The IRS isn’t going after everybody
Even with its additional funding, the IRS will not have the capacity to thoroughly examine every single tax return it receives this year. As such, the agency has to focus on audits that are likely to yield the most money. And that means the only people who are likely to see an uptick in audit activity this year are higher-income individuals.
In fact, the IRS said a few months ago that it’s seeking to “restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations, and promoters abusing the nation’s tax laws.” What this tells us is that if you earn an average wage, your audit risk in 2024 is probably comparable to what it was in 2023 — really low.
Steps you can take to avoid a tax audit
More often than not, a tax audit only means having to answer some additional questions the IRS poses by mail or submit additional documentation to the agency. The majority of tax audits are not conducted in person because the IRS doesn’t have the resources to do that.
But still, your preference may be to avoid a tax audit this year, and that’s understandable. The good news, though, is that there are steps you can take to lower your audit risk.
Mark Steber, Chief Tax Information Officer at Jackson Hewitt Tax Services, says, “Mismatched information from a taxpayer’s tax return versus what the IRS was given from the taxpayer’s employer, bank, or other tax documents” could trigger an audit. So it’s important to make sure you’re reporting all income accurately.
If you earned interest in a savings account last year, access your 1099 form from your bank and list the exact amount on your taxes. If you guess at that amount and put $1,000 on your tax return when you really earned $1,047, the IRS is likely to flag your return because it will have a 1099 form from your bank showing a different amount.
Incidentally, the same thing is likely to happen if you report $1,000 in interest income when you only earned $994. The IRS will sometimes flag mistakes even if your error works in its favor.
Steber also says that tax returns with missing income are more likely to trigger an audit. So if you earned a small amount of freelance income from a handful of clients in 2024, report those earnings.
Honesty is really the best policy
All told, being honest on your tax return is the best way to avoid getting into trouble with the IRS. So if you make a point not to fudge your deductions or avoid reporting income, you may find that you’re not chosen for an audit even if you are a higher earner.
What’s more, perhaps your situation is more likely to trigger an audit, such as if you had a large number of self-employment deductions last year relative to the income you earned. If those deductions are ones a tax professional confirms you’re entitled to, don’t avoid taking them because you’re scared of an audit.
If the IRS asks for proof of those deductions, you’ll have it. And while you might have to spend a little time sending over documentation, at the end of the day, there shouldn’t be any financial penalty involved if the deductions you’ve claimed are accurate and legitimate.
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