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What Triggers an IRS Audit?

The recently enacted Inflation Reduction Act of 2022 allocates $80 billion to the IRS. This has caused taxpayers to be concerned over stepped-up IRS tax payment enforcement and audit activity. The tax audit lawyers at Ayar Law believe that one of the best defenses to a prospective audit is understanding the red flags that might cause heightened scrutiny of a taxpayer’s or a business’s annual returns

Through more than ten years of representing and defending Michigan taxpayers, we have identified some of the more common situations that can trigger an IRS audit.

 What are the likely scenarios that can trigger an IRS audit?

The IRS uses artificial intelligence, human monitors, and other systems to flag personal and business returns in certain categories:

  • Annual personal income is more than $500,000
  • Mismatches between reported income and revenues reported on W-2s, 1099s, K-1s, and other income forms that the IRS collects
  • Excessive claims of credits or deductions, particularly if those claims are not consistent with average claims from other filers
  • Unusual year-to-year increases or decreases in claimed income, credits, or deductions
  • Reports of funds held in offshore accounts
  • Transactions involving cryptocurrencies
  • Large cash transactions
  • Sizable claims for expenses for the use of a home office or use of a car for business
  • Regular year-after-year losses in a personal business, which make that business look more like a hobby than a genuine income-generating activity
  • Unusual passive income, including rents from real estate holdings that are too high or low in comparison to similar rental properties
  • Transactions within or withdrawals from retirement accounts

In and of themselves, none of these categories will automatically cause an audit. Instead, they increase the focus the IRS will devote to a return. Michigan-based taxpayers and businesses should consult with a seasoned Michigan tax audit attorney if their returns reflect any of these categories and are concerned over the potential for an IRS audit.

Taxpayers have a right to appeal the results of an audit

The initial results of an IRS audit are not necessarily the final word, regardless of how adverse those results might appear to be. All taxpayers have rights, including an absolute right to appeal an IRS audit. This could include a direct IRS appeal to the agency’s Office of Appeals, filing a lawsuit over the issues in the audit in a Federal Tax or District Court, and requesting reconsideration of the audit. If a taxpayer is unable to pay back taxes, fines, and penalties, that taxpayer can also submit an offer in compromise to the IRS or apply for an abatement of penalties.

A taxpayer’s appeal rights, including the deadline for filing an appeal, are more limited in a Michigan State tax audit. However, given the short deadlines and other requirements for filing an appeal, a taxpayer should never hesitate to contact a tax audit appeal lawyer as soon as possible.

Call Ayar Law for Assistance with IRS Audits and Audit Appeals

The tax audit attorneys at Ayar Law in Farmington Hills help Michigan taxpayers to reduce their tax audit risk. When an audit does happen, we will represent you before the IRS or Michigan tax agency to respond to inquiries and minimize its adverse effects. We can also guide you through the correct appeal channels to reduce the after-effects of your federal or state audit.

Please call us at your earliest convenience for answers to your questions about your Michigan state or federal tax audit risks and an assessment of your exposure to adverse audit consequences.