Navigating tax season can be a nerve-wracking experience, especially for those wary of catching the eye of the IRS. But fear not! By understanding common triggers for IRS audits and taking proactive steps to address them, you can minimize your risk and ensure a smoother tax-filing process. 

John Milikowsky,  CEO and Founder of Milikowsky Tax Law, discusses key triggers for IRS audits in 2024:

Here, we’ll delve into several ways individuals and businesses might inadvertently attract IRS scrutiny.

1. Failure to Report Taxable Transactions

The first surefire way to attract IRS scrutiny is by failing to report taxable income transactions. This could include proceeds from the sale of assets like houses or stocks, particularly if those transactions generate a 1099 form. Ignoring or underreporting such income increases the likelihood of your return being flagged for an audit.

In cases where there’s a discrepancy between reported income and information provided by third parties, the IRS may initiate a correspondence audit. You’ll receive a letter notifying you of the mismatch and providing a window of 30 days to respond with documentation and explanations. However, repeated instances of underreporting or failure to file altogether can trigger a full-scale audit.

To avoid this, ensure meticulous record-keeping and accurately report all sources of income on your tax return. Double-check your forms for accuracy and consistency to minimize the risk of discrepancies that could trigger an audit.

2. Neglecting to Disclose Cryptocurrency Transactions

In recent years, the IRS has ramped up efforts to scrutinize cryptocurrency transactions. If you engage in significant cryptocurrency activities but fail to report them accurately on your tax return, you’re inviting trouble. The IRS now explicitly asks taxpayers about their cryptocurrency holdings and earnings on Form 1040.

Failure to disclose cryptocurrency transactions, whether buying, selling, or transferring funds, can raise suspicions during an audit. Banks and financial institutions are required to report these activities to the Treasury, leaving a digital trail that auditors can follow. If your return raises other flags, such as inconsistencies or unusually large deductions, your cryptocurrency dealings may come under intense scrutiny.

To avoid running afoul of IRS regulations regarding cryptocurrency, ensure full disclosure of all relevant transactions on your tax return. Keep detailed records of your cryptocurrency activities, including dates, amounts, and transaction IDs, to provide evidence of compliance in the event of an audit.

3. Mishandling Cryptocurrency Audit Inquiries

If your tax return triggers an audit related to cryptocurrency transactions, it’s crucial to handle the inquiry with care. Auditors will likely pose detailed questions about your cryptocurrency accounts, transactions, and the origin of funds. Honesty and transparency are paramount during these discussions.

If you hold decentralized cryptocurrency wallets, expect auditors to probe further into the nature and purpose of your transactions. Seeking professional assistance from a tax attorney or accountant experienced in cryptocurrency matters can help you navigate the complexities of an IRS audit effectively.

4. Overstating Deductions or Credits

While claiming deductions and credits is a legitimate way to reduce your tax liability, overstating them can raise suspicion and trigger an audit. Excessive or unsubstantiated deductions, particularly in relation to income level or industry norms, may prompt the IRS to take a closer look at your return.

Common areas where individuals and businesses may overstate deductions include charitable contributions, business expenses, and home office deductions. Make sure to keep thorough documentation and only claim deductions to which you’re entitled.

5. Reporting Round Numbers

While it may seem convenient to report rounded figures on your tax return, doing so can raise eyebrows at the IRS. Round numbers can signal estimates rather than precise calculations, leading auditors to scrutinize your return more closely.

To avoid drawing unnecessary attention, take the time to report accurate figures based on actual records and calculations. Providing precise numbers demonstrates diligence and transparency, reducing the likelihood of triggering an audit.

Final Notes

By steering clear of these three common pitfalls, you can significantly reduce the likelihood of attracting unwanted attention from the IRS. Remember to accurately report all taxable transactions, including cryptocurrency dealings, and respond promptly and honestly to any audit inquiries.

In the end, proactive compliance and transparency are your best defenses against IRS audits. By staying informed and diligent, you can ensure a smooth and hassle-free tax-filing experience.

Learn More About Milikowsky Tax Law

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.

Interested in learning more? Read on to learn how to respond to an IRS audit.

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