The IRS’s Focus on Small Amounts of Unreported Income: A Deeper Dive

Understanding the IRS’s Audit Threshold

The Internal Revenue Service (IRS) has a vested interest in ensuring that taxpayers accurately report their income and pay their fair share of taxes. To achieve this, the IRS conducts audits, which involve examining a taxpayer’s financial records to verify the accuracy of their tax return.

While the IRS does not have a specific minimum threshold for unreported income that triggers an audit, any discrepancy between the income reported on a tax return and the income recorded by the IRS can raise red flags. This means that even small amounts of unreported income can potentially lead to an audit.

Factors Influencing Audit Selection

The IRS uses a variety of factors to select tax returns for audit, including:

• Income level: Higher-income taxpayers are more likely to be audited, as they have a greater potential tax liability.
• Discrepancies: Significant differences between the income reported on a tax return and the income reported to the IRS by employers or other sources can trigger an audit.
• Complex returns: Tax returns with numerous deductions, credits, or other complexities are more likely to be audited, as they are more prone to errors.
• Prior audit history: Taxpayers who have been audited in the past are more likely to be audited again.
• Industry: Certain industries, such as self-employment and cash-based businesses, are more likely to be audited due to the higher risk of unreported income.

The IRS’s Focus on Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a tax credit designed to benefit low- and moderate-income working individuals and families. However, the EITC has also become a target for IRS audits due to concerns about improper payments.

In recent years, the IRS has increased its focus on auditing EITC claims, leading to a disproportionate number of audits among low-income taxpayers. This has raised concerns about the IRS unfairly targeting low-income families and creating a barrier to accessing a valuable tax benefit.

Consequences of Unreported Income

Failing to report all income on a tax return can have serious consequences, including:

• Audit: The IRS may initiate an audit to investigate the unreported income.
• Penalties: Taxpayers may be subject to penalties for underreporting their income, which can range from 20% to 75% of the unpaid tax.
• Interest: Interest will be charged on the unpaid tax from the original due date of the return.
• Criminal charges: In severe cases, unreported income can lead to criminal charges, such as tax evasion.

Avoiding IRS Scrutiny

To minimize the risk of an IRS audit, taxpayers should:

• Accurately report all income: This includes income from all sources, including wages, self-employment, investments, and any other taxable income.
• Keep good records: Maintain accurate records of all income and expenses to support the information reported on the tax return.
• Seek professional help: If a tax return is complex or involves significant deductions or credits, consider seeking professional help from a tax preparer or accountant.
• Respond promptly to IRS inquiries: If the IRS contacts a taxpayer regarding a potential audit, respond promptly and provide the requested information.

While the IRS does not have a specific minimum threshold for unreported income that triggers an audit, any discrepancy between the income reported on a tax return and the income recorded by the IRS can raise red flags. Taxpayers should accurately report all income and maintain good records to minimize the risk of an audit.