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Understanding IRS Lifestyle Audits: What You Need to Know

Income tax returns have always been the cornerstone of financial accountability. But did you know that the IRS has now taken a more comprehensive approach to ensure accuracy? Welcome to the era of lifestyle audits. In this blog, we’ll delve into what a lifestyle audit entails, how it works, and its potential implications.

What is a Lifestyle Audit?

A lifestyle audit is an IRS method of scrutinizing your income tax return in comparison to your actual lifestyle. If the income reported seems insufficient to support your evident lifestyle or the locality you reside in, your return might be flagged for a closer look.

What Triggers a Lifestyle Audit?

Imagine you’re self-employed, a business owner, or a wage earner. You might be reporting a seemingly modest income, but if your lifestyle suggests otherwise – perhaps you have a substantial mortgage, multiple rental properties, and a large family – the IRS could raise questions about how your reported income aligns with your lifestyle.

Identifying Discrepancies

One common question is, how can you support such a lifestyle with the income reported on your tax return? While IRS generally waits a couple of years before flagging returns for audits, it could happen sooner. They assess whether the lifestyle you exhibit is consistent with the income you’ve reported.

Two Approaches: Lifestyle and Bank Deposit Analysis

Apart from lifestyle audits, the IRS employs the bank deposit analysis. This involves scrutinizing all deposits in your bank accounts – personal and business. They exclude nontaxable deposits, such as account transfers or insurance payments for losses. The total deposits should ideally match your reported income on your tax return.

Uncovering Unreported Income

If the IRS determines that you haven’t reported all your income, they might assess additional taxes for the unreported amounts. This can potentially lead to uncovering other unreported transactions on your tax return, which could result in further discrepancies.

John Milikowsky’s Perspective

As Founder of Milikowsky Tax Law, I’ve witnessed the increasing use of lifestyle audits by the IRS. This new approach emphasizes accuracy and transparency in income reporting. It’s crucial to ensure that your lifestyle aligns with your reported income to avoid any potential audit triggers.

The era of lifestyle audits signifies a more holistic approach by the IRS. It’s essential to maintain consistency between your income tax return and your lifestyle to avoid any red flags. If you have questions about lifestyle audits, reporting income accurately, or need assistance in navigating IRS processes, feel free to reach out.

At Milikowsky Tax Law, we specialize in providing expert guidance on tax matters. If you found this information valuable, consider reaching out for further assistance. I’m John Milikowsky, and I hope this insight into lifestyle audits helps you better understand this evolving landscape.