WHAT TRIGGERS A TAX AUDIT

The editor of The Kiplinger Tax Letter responds to readers asking about the chances the IRS will take a closer look at their return.

- BY JOY TAYLOR

Friends have told me that I don’t have to worry about IRS audits anymore. Are they right? No. It is true that major cuts to the IRS’s funding and its workforce will reduce the number of tax audits the agency can perform. In recent years, the IRS audit rate for individuals was significantly below 1%, and we expect this figure to continue to decline, at least over the next few years. But that doesn’t mean it’s a free-for-all for tax cheats. According to IRS leaders, there will be fewer overall audits, but the exams that are done will be more targeted.

The IRS is relying on data analytics and artificial intelligence to more precisely identify high-risk noncompliance and to improve efficiency. Data-mining software can sift through taxpayer data, expose suspicious activity and identify audit cases.

I am a tax preparer, and many of my clients claim refundable tax credits on their federal returns, such as the earned income credit, the refundable portion of the child credit, the Affordable Care Act premium credit and the American Opportunity credit. I heard that the IRS will be eyeing these credits more than ever before. Do you think this is true? Yes. The IRS’s enforcement arm is feeling the brunt of the government’s funding cuts as well as recent employee resignations and layoffs. Many of the workers who retired or left the IRS were experienced agents and managers with deep knowledge of the tax law and the processes for conducting complex tax audits of individuals and businesses.