An IRS audit can be a daunting experience, with various factors such as unsubstantiated deductions, unreported income, and undeclared cryptocurrency holdings potentially triggering an investigation.
Investors, in particular, need to be vigilant for investing-related audit triggers. However, taxpayers can take comfort in the fact that the probability of being audited is relatively low, with only 0.4 percent of individual returns in fiscal 2022 being flagged for an audit.
Additionally, most of these audits are handled through the mail, making the intimidating sit-down with a tax agent more of a Hollywood myth than a real-world possibility. To know more about bitcoin trading you can visit bitalpha-ai.org
Key Investment-Related Factors That Can Trigger an IRS Audit
Missing Interests and Dividends
Inadvertently omitting dividends and interest earned from banks and brokerages can raise the IRS's interest, particularly if the amount is significant. However, even if an error is made, taxpayers need not panic.
According to Armstrong, receiving a notice from the IRS for underreporting income is a common occurrence, usually resulting from an innocent mistake such as overlooking a 1099 form for bank interest or stock dividends. These oversights are easily rectifiable, and there is no need for undue concern.
In the event of an underreported income, the IRS may correct the deficiency and deduct the additional amount from the taxpayer's filed return.
Alternatively, if the underreported tax exceeds the refund amount, taxpayers may be required to pay the difference. However, omitting a significant 1099 form may lead to more severe consequences.
Failure to Report Cryptocurrency
As per Brian R. Harris, a tax lawyer at Fogarty Mueller Harris, PLLC located in Tampa, the IRS is currently placing significant emphasis on the regulation of cryptocurrency. As a result, if you have traded, held, or utilized any digital assets, you may be a prime target for an audit or compliance check.
The recent update to annual tax returns now requires taxpayers to declare whether they have engaged in transactions involving digital assets, with the question appearing prominently at the top of Form 1040.
Therefore, it is difficult to claim ignorance of this requirement. Failing to report the ownership or trading of digital currency or NFTs could result in severe consequences.
In addition to failure to report ownership or trading of digital currency or NFTs, other crypto-related issues could result in legal problems.
A pressing concern in the realm of digital currency is the tax obligation stemming from capital gains, even if the currency has been used for purchases and not traded. It is crucial to remain attentive as certain exchanges or brokers may neglect to send 1099 forms detailing gains and losses to the IRS.
Furthermore, if you're spending crypto, you'll need to keep your records and calculate your tax liability independently.
Filing Late
Punctuality is important when it comes to paying taxes to the IRS. This may be challenging for investors, particularly if they have complex investments or receive year-end statements late in the tax season.
Some companies may even report tax information after the usual April 15th tax deadline. Despite the complexity of an investor's tax return, timely filing is still expected by the IRS. By filing on time, you can avoid attracting unwanted attention from the IRS and stay off their radar.
Final thoughts
Investors must be mindful of any deductions or additional sources of income that could catch the attention of the IRS. In addition to typical audit triggers such as unsubstantiated deductions or missing income, investors should keep track of income from their investments such as stocks, bonds, and real estate.
However, it is equally important for them to take small but crucial steps to avoid raising any red flags with the IRS.
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