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Why Leaner IRS Operations Could Heighten Your Audit Probability

You may have come across headlines such as:
 “IRS Funding Slashed.” “Audit Rates Down.” “Staffing Cuts.”

If you’re a business owner, investor, or part of a high-net-worth household, these may seem like promising developments—finally, some respite.

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In truth, the IRS is becoming more strategic in its audit processes.

The IRS’s Focus: Targeted Efficiency with DIF

With reduced personnel and an emphasis on heightened efficiency, the IRS increasingly leans on technology, using the Discriminant Inventory Function System (DIF).

Think of the DIF as a sophisticated algorithm that assigns risk scores to tax returns by comparing reported data against industry norms. The greater the disparity between your figures and typical benchmarks for your earnings level or industry, the higher your audit likelihood.

Curious about how DIF operates? Peruse the GAO’s insights on IRS audit selection.

Major Audit Triggers You Should Know

Considering the latest IRS trends and industry data, here are the primary audit alerts:

  • Unreported income – Includes everything from 1099 earnings to crypto profits, rental income, and tips. Omission may result in a CP2000 notification.

  • High deductions relative to income – Earning $75,000 while claiming $40,000 in business deductions? The DIF will take note, especially for Schedule C filers.

  • Crypto transactions – Digital asset dealings are rapidly becoming an audit focal point. If you skip IRS Form 8949 or the requisite checkboxes, tread carefully.

  • Consistently reported business losses – Recurring losses might lead the IRS to classify your enterprise as a hobby, nullifying deductions.

  • Cash-heavy businesses – Industries like restaurants and salons, operating significantly in cash, often face scrutiny for potential underreporting.

  • Home office claims – Ensure you meet the “exclusive and regular use” stipulation to avoid issues.

Modern IRS: Digital Precision over Paper Trails

Today's IRS relies less on traditional mail and more on intricate algorithms and advanced matching engines, often sending notices such as the CP14 (outstanding balance) or CP2000 (income discrepancies) months post-filing.

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Unbeknownst to many, flags are often raised facing interest and penalties prior to taxpayer awareness.

Proactive Measures to Consider

Here’s the upside: An audit doesn’t necessitate fear but rather readiness.

  • Verify your tax returns for precision and alignment with W-2s, 1099s, and crypto documentation

  • Maintain accurate records of all deductions, travel miles, and business expenditures

  • Seek professional advice for past filings or unclear IRS notices

  • Understand audit choices are more about behavioral patterns than pure income levels

Need Reassurance or Expert Analysis?

If these points resonate with your situation or if you’ve received perplexing IRS correspondence, avoid assumptions. Our office provides comprehensive reviews of IRS transcripts, elucidates any notices, and guides you through necessary steps.

We offer transparency, focusing on factual insights about the IRS’s current modus operandi.

Connect with us for guidance in assessing your circumstances or comprehending your audit exposure. Our mission is to inform, not intimidate. 

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