Can individuals who are not wealthy avoid the IRS audit by staying low-key?

Understanding the IRS Crackdown on High-Income Earners and Partnerships

By Morey Stettner

The Internal Revenue Service (IRS) recently announced its intention to prioritize high-income earners and partnerships in its efforts to ensure tax compliance. This shift in focus means that audit rates will remain unchanged for individuals earning less than $400,000 annually.

While the IRS’s commitment to holding “our wealthiest filers accountable to pay the full amount of what they owe” may raise questions about the potential for tax evasion, it’s important to understand the context of this announcement.

The IRS is not suggesting that it will turn a blind eye to tax evasion among less-wealthy individuals. Rather, the agency plans to allocate new funding from the Inflation Reduction Act to reverse the decline in audits for high-income taxpayers over the past decade.

It’s crucial to distinguish between tax avoidance, which is legal, and tax evasion, which is illegal. Tax avoidance refers to legitimate tax strategies that take advantage of gray areas in tax laws. On the other hand, tax evasion involves deliberately providing false information or substantially underreporting income.

If you’re considering engaging in tax avoidance, it’s essential to assess the likelihood of successfully defending your tax position in an audit. Most taxpayers are not attempting to commit fraud but seek clarification on whether specific deductions are permissible.

For instance, when it comes to rental properties, determining the appropriate deduction can be challenging. Suppose a property owner purchases a lawnmower for a rental property that is also used as a primary residence. While the deduction should reflect the percentage of use for the rental property, the exact percentage can be ambiguous.

Before engaging in any tax avoidance strategy, it’s crucial to understand the associated risks. Consulting with a tax professional can help you navigate potential penalties and ensure full compliance with IRS regulations.

Tax advisors should play an active role in discussing the risks of tax avoidance with their clients. By doing so, they enable taxpayers to make informed decisions about the level of risk they are willing to assume. This approach ensures that taxpayers are fully aware of the potential consequences of an audit and the monetary implications involved.

In conclusion, the IRS’s focus on high-income earners and partnerships does not grant individuals earning less than $400,000 permission to provide inaccurate information on their tax returns. However, if there is a legitimate legal basis for tax avoidance, and you can reasonably defend your reporting rationale, it may be worth considering. Just remember to fully understand the risks involved and seek professional advice when necessary.

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Read More of this Story at www.morningstar.com – 2023-10-21 12:49:00