As an individual or business owner, it is crucial to comply with tax laws to avoid legal issues and penalties. One way the IRS ensures tax compliance is through audits. The IRS conducts various types of audits, one of which is the Iris audit. But what triggers an Iris audit?
The Iris audit is an automated system that selects tax returns for further review based on specific triggers. These triggers are based on data analytics and algorithms that identify tax returns with a high likelihood of non-compliance. Understanding these triggers can help taxpayers avoid an audit and ensure compliance with tax laws.
Types of Income
The type of income reported on a tax return can trigger an Iris audit. Income reported from various sources such as rental income, self-employment income, and investment income are more likely to trigger an audit. This is because the IRS has identified that taxpayers tend to underreport income from these sources.
Additionally, inconsistent income reporting can also trigger an audit. If a taxpayer reports a significant increase or decrease in income from year to year, it can raise a red flag and trigger an audit.
Deductions and Credits
Deductions and credits claimed on a tax return can also trigger an Iris audit. Taxpayers who claim a high amount of deductions or credits relative to their income are more likely to be audited. This is because the IRS has identified that taxpayers tend to overstate deductions and credits to reduce their tax liability.
Additionally, claiming deductions or credits that are not commonly used can raise suspicion and trigger an audit. Taxpayers should ensure that they have proper documentation to support any deductions or credits claimed on their tax return.
Filing and Payment History
A taxpayer’s filing and payment history can also trigger an Iris audit. Taxpayers who have a history of late filings or payments are more likely to be audited. The IRS uses data analytics to identify taxpayers with a history of non-compliance and targets them for audits.
Additionally, taxpayers who have previously been audited and found to have non-compliance issues are more likely to be audited in the future. It is essential for taxpayers to address any compliance issues identified during previous audits and ensure that they are in compliance with tax laws.
In conclusion, various factors can trigger an Iris audit. Taxpayers should ensure that they report all income and claim only legitimate deductions and credits. It is also essential to file and pay taxes on time to avoid triggering an audit. By understanding these triggers, taxpayers can take proactive measures to avoid an audit and ensure compliance with tax laws.