An IRS lifestyle audit is an investigation conducted by the Internal Revenue Service (IRS) to examine an individual’s or business’s lifestyle and financial activities to identify potential tax noncompliance.

Purpose:

The primary goal of a lifestyle audit is to identify discrepancies between reported income and actual lifestyle expenditures, which may indicate unreported income, tax evasion, or other financial irregularities.

Lifestyle audits are often triggered by:

1. Significant discrepancies between reported income and lifestyle expenses.
2. Whistleblower tips or information from third-party sources.
3. Public records or social media indicating lavish spending.
4. Previous tax audits or noncompliance.

During a lifestyle audit, the IRS may:

1. Review financial records, tax returns, and other documents.
2. Conduct interviews with the individual or business owners.
3. Analyze bank statements, credit card records, and other financial data.
4. Inspect assets, such as real estate, vehicles, and other luxury items.

Potential Outcomes:

1. Additional taxes, penalties, and interest assessed.
2. Civil or criminal charges for tax evasion or fraud.
3. Closure of the audit with no changes to tax liability.

To minimize the risk of a lifestyle audit:

1. Maintain accurate and detailed financial records.
2. Report all income and claim legitimate deductions.
3. Avoid lavish spending or suspicious transactions.
4. Consult with a tax professional to ensure compliance.