The Internal Revenue Service (IRS) monitors income reporting and tax payments to ensure compliance with tax laws. Certain amounts and types of income as well as inconsistencies can trigger an IRS audit or review. Here’s what you need to know about income amounts that may get the IRS’s attention.
Overview of IRS Triggers
There are a few key thresholds and behaviors that might increase IRS scrutiny. These include:
- High incomes
- Unreported income
- Suspicious deductions or business losses
- Math errors on a return
- Discrepancies between federal and state tax returns
Audits tend to focus on taxpayers with complex returns and contradictory information. While higher incomes raise a red flag, even lower and middle incomes may be audited if something seems inaccurate or questionable.
High Incomes
Higher incomes naturally warrant more attention from the IRS because there is more opportunity for errors, questionable deductions, and tax evasion. For 2022 individual tax returns, here are some of the income levels that may increase audit risk:
- $200,000+ income: 1.53% audit chance
- $1 million+ income: 3.37% audit chance
- $5 million+ income: 6.66% audit chance
- $10 million+ income: 11.56% audit chance
These numbers fluctuate from year to year but indicate how much audit risk rises along with income. Very few middle-class returns with straightforward information get audited.
Unreported Income
The IRS receives reporting documents like W-2s and 1099s that state your annual income amounts. If you fail to report income shown on these documents, it will automatically trigger IRS scrutiny. The IRS also estimates business income and the “tax gap,” the difference between taxes owed and paid.
Any sizable unreported income discovered through 1099s or statistical estimates can lead to an IRS letter or audit. Ensure you report all your legitimate taxable income.
Suspicious Deductions
Claiming excessive deductions, especially business losses, can draw IRS attention. If you report significant losses multiple years in a row or take unusual deductions that seem disproportionate to your income, the IRS may flag your return.
Make sure all your deductions are allowed by the tax code and supported by documentation in case of an audit. Avoid claiming 100% of a vehicle’s use for business unless you have records to prove it.
Math Errors
Simple math errors on a tax return, such as incorrect additions or miscalculations, can prompt the IRS to look closer. Even one math error makes your return more likely to be examined for other mistakes or misreported figures.
Double and triple check your math when preparing your taxes. Consider using tax software that does the math for you and flags potential errors.
Discrepancies Between Federal and State Returns
If the income, deductions, credits, or other information reported on your federal return doesn’t match your state return, it can raise IRS concerns. Inconsistent numbers suggest possible mistakes or exaggerations.
Make sure your income, adjustments, and other key amounts exactly match on your federal and state tax returns.
Other IRS Audit Triggers
Some other behaviors and tax situations can increase your audit chances with the IRS:
- Being self-employed
- Claiming hobby losses from a side business
- Taking the Earned Income Tax Credit
- Having foreign bank accounts or foreign income/investments
- Owing prior year taxes
- Having a gap between projected and actual income
Random audits are also a possibility, albeit rare. The IRS audits only around 1% of individual returns overall.
Strategies to Avoid IRS Scrutiny
You likely won’t encounter problems if you:
- Report all taxable income
- Take only allowed, documented deductions
- File accurate federal and state returns
- Avoid excessive business losses
- Check thoroughly for math errors
Consider consulting a tax professional if your situation involves complex returns, multiple businesses, foreign assets, recent IRS trouble, or high audit risk.
What to Do If Audited by the IRS
If you receive an IRS audit letter, don’t panic. Most audits simply require you to mail in documentation supporting a questioned deduction or income. About three-quarters of correspondence audits close without the IRS making a change.
For office or field audits, gather all relevant records and consider whether to have a tax pro represent you. Answer questions truthfully. If the IRS finds legitimate mistakes, work cooperatively to fix and pay any additional tax.
Conclusion
While the IRS audits only around 1% of individual taxpayers, larger incomes and suspicious activities like unreported income or excessive deductions can increase your risk. File accurate, consistent returns with supportable figures to minimize IRS red flags. If audited, have records ready and work with the IRS to resolve any legitimate issues.