Selecting for an audit doesn't always suggest that there's a problem. We compare your tax return with the rules applicable to similar returns. First, the IRS is motivated to audit returns in order to find unreported income. To do this, they carry out both random and strategic audits.
IRS computers choose people to audit, but if those taxpayers respond, a person must review the documents. Because there are fewer employees doing so, delays have increased in an already difficult process, according to several lawyers who represent taxpayers through the Low-Income Taxpayer Clinic program. They said it normally takes more than a year for a taxpayer's refund to be released, even for those who are represented. At this stage of the process, the IRS is simply interested in enforcing taxes on the virtual currency.
The reason for this is that IRS auditors are expected to interpret an increasingly complex revenue code and are poorly trained due to budgetary restrictions. The IRS will ask you for your wallet identifier and blockchain addresses to gather detailed information about any virtual currency transaction. There isn't much you can do to reduce your chances of being audited by the IRS because the formula for calculating who is audited is not common knowledge. They should provide you with a rough idea of the types of things the IRS looks for when it audits a cash return.
First of all, most major refunds are not associated with standard W2 taxpayers, but are indicative of large losses on the taxpayer's return or of something that has offset a large amount of taxes that the taxpayer would have had to pay. While the IRS accepts most tax returns when they are filed, there are circumstances that warrant an audit based on this data point system. Suspicious activity can trigger an audit, but there is no definitive reason why the IRS should not audit taxpayers at specific times and for specific reasons. The motivations surrounding IRS audits tend to reveal a lot about the purpose of each type of audit and the overall strategy of the Internal Revenue Service.
I've seen IRS revenue agents (auditors) roll their eyes when they see that complicated expense categories come out as a good even number. In 1998, Taxpayer Bill of Rights III called for changes in the type of customer service solutions that the IRS must provide to both taxpayers and audited taxpayers. While early investors in virtual currencies may have used the incompetence of the IRS to their advantage, it is highly unlikely that such methods will continue to be successful. By taking a closer look at income earned in different years (as well as supporting documents), the IRS can sometimes find discrepancies between what a taxpayer earned and, specifically, the IRS focuses on returns where taxpayers can manage large amounts of cash and considers that it is an audit warning sign when a return contains a high probability of unreported income.
In an IRS office audit, the revenue agent will ask the taxpayer to come and analyze their tax return and to bring supporting documents. There are also four different types of IRS audits, so find out what it is before you start to panic.