It is that time of year again. Taxpayers throughout the country are gathering tax forms and starting to figure out how to put together returns for the 2019 tax year. While getting this information together this tax season, some may wonder how the Internal Revenue Service (IRS) decides whether or not to conduct a tax audit.
As discussed in a previous post, available here, there are certain red flags that can increase the risk of an audit. However, a recent report finds that sometimes actions alone do not lead to an audit. According to the report, the IRS has disproportionately audited certain groups of taxpayers simply because they fall into one of these two categories:
- The rich. This goes along with some of the common red flags in the previous post noted above. Those who claim over $1 million in income are more likely to have their tax returns reviewed by the IRS compared to those who do not.
- The poor. Those who claim less then $25,000 in income on their tax returns are more likely to face scrutiny compared to those who claim between $25,000 and $500,000.
Although the first group may not come as a surprise, it may be disconcerting that the poor are also at an increased audit risk. The increase is significant — the poor are 50% more likely to be the subject of a federal tax audit. Why? The IRS states concerns about “fraud and errors related to the Earned Income Tax Credit” make it more likely the agency will review a return that claims $25,000 or less in income.