How to Avoid IRS AI Red FLAGS – Professional Tax Services

The tax gap is the difference between what taxpayers owe the IRS and what the agency actually collects. The current estimated tax gap is between $500 and $700 billion annually. The IRS believes it will greatly reduce that gap by catching unreported income faster, reducing audit costs, and nudging compliance through AI machine learning and advanced analytics.
AI will auto-check small mismatches like forgetting to report a bank 1099 or a small stock dividend. So, what should you do to best avoid problems with the IRS?
Report all income: AI will cross-check W-2s, 1099s, bank/cryptocurrency records, and 1099-Ks. Keep a list of all income documents.
Watch for red flags: AI will compare your numbers with your industry. Thus, avoid overstating deductions if they don’t align with your type of business. If you do, be prepared to demonstrate why you differ from the norm.
Report crypto transactions: AI blockchain tools will flag hidden wallets. Report ALL gains and losses, and use crypto software to generate your reports.
Keep records organized: Use bookkeeping apps, and save copies of receipts.
Carefully check high-risk deductions. Only deduct what you can prove with receipts, logs, or mileage apps.
Avoid Lifestyle Mismatches: If you make $100k a year and pay cash for a $75k Lexus, expect a red flag. Be ready to explain mismatches or avoid them.
File on time even if you can’t pay yet. AI will aggressively flag non-filers. Meet the deadline or get an extension.
Work with a tax professional. If there will be complexities with your tax return, get a tax professional to answer your questions ahead of time, and have the professional handle your return. You want to safely limit your tax liability while maintaining a low risk of an audit. We provide our clients with unlimited complimentary tax planning advice.
Keep your records for three to seven years. The IRS has three years to audit, but up to six for major underreporting. Store copies of your returns, receipts, and logs.
If you have any questions, we welcome you to contact us.
Professional Tax Services is a locally owned provider serving over 3,700 local residents and businesses. For more information, call 661-259-1967 or visit www.scvprotaxservices.com.