Tax season is underway and the IRS is hard at work processing the millions of returns being filed. While most returns will be accepted without a second glance, a select group of taxpayers will find themselves subject to closer scrutiny in the form of an audit.A financial advisor can help you figure out what you should do with your taxes. Let’s break down the most common IRS audit triggers.
IRS Audit Triggers
The IRS conducts audits on a small number of returns each year, typically under 1% of those filed. Some unlucky taxpayers are chosen at random but others may be targeted if their return sends up a red flag. Certain factors are more likely than others to trigger an audit and knowing what they are can help you avoid unwanted attention from Uncle Sam.
1. Underreporting Income
Failing to report all of your income is one of the easiest ways to boost your odds of being audited. Whenever you’re issued a W-2 or 1099 for taxable income you’ve received, the IRS automatically gets a copy too. When you file your return, the IRS will check to make sure the amount of income you’re reporting is the same as what they have on file. If the numbers don’t match up, there’s an excellent chance that you’ll be contacted for an audit to find out why.
2. Making Too Much Money
Statistically speaking, high-income taxpayers are much more likely to be targeted for an audit. IRS statistics show that in 2014, the audit rate was 0.86% for taxpayers. Jump to the 2022 tax year and the rate falls even further, to 0.38%, as the IRS has chosen to audit fewer and fewer upper-class filers. Still, if your income has jumped significantly over the last year, it could increase your chances of showing up on the IRS radar.
3. Claiming Large Deductions
Claiming deductions for things like charitable donations or medical expenses to lower your tax bill doesn’t in itself make you prime audit material. But claiming substantial deductions in proportion to your income does. For example, if you reported income of $50,000 and charitable donations of $25,000 it might raise an eyebrow with the IRS.
The same is true if you’re claiming deductions for business expenses, including travel, lodging and entertainment. If what you’re claiming is significantly higher than what the IRS considers to be average for taxpayers in your income bracket, they may want to take a closer look at your return. Keeping accurate travel records and receipts for all of your deductions is your best bet if the IRS decides to come calling.
4. Mathematical Errors
Doing your returns yourself can save you a lot of money on tax preparation services but it could get you into trouble if you’re not careful. Something as simple as putting a decimal point in the wrong place or adding numbers incorrectly could be enough to trigger an audit. Estimating or rounding up numbers is also a big no-no, since it may look like you’re fudging the facts to the IRS.
5. Claiming Business Losses
With the economy still struggling to get back on solid ground, it’s not uncommon for business owners to report losses on their taxes. If you’re claiming unusually large losses, don’t be surprised if the IRS wants to double-check your return. The same is also true when it comes to hobby activities.
You’re allowed to deduct expenses for a hobby, up to the level of income you earn but you can’t deduct losses. If you claim hobby losses and you’re audited, you’ll have to prove that the activity has a business aspect to avoid a penalty.
6. Taking the Home Office Deduction
The home office deduction is allowed for certain expenses incurred if you work from home. The IRS has strict guidelines about when you can claim the deduction and how much you can deduct so you need to know what the guidelines are before you file. If you’re claiming a large home office deduction, the IRS may ask you to prove your expenses are legit.
Bottom Line
The prospect of an audit can be panic-inducing but you shouldn’t let it keep you from getting all of the credits and deductions you’re entitled to. There’s no way to guarantee you won’t be audited but some careful tax planning can help you keep your profile as low as possible.
Tips to Help You Get Through Tax Season
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
FAQs
1. Taking Large Deductions. Returns with extremely large deductions in relation to income are more likely to be audited. For example, if your tax return shows that you earn $25,000, you are more likely to be audited if you claim $20,000 in deductions than if you claim $2,000.
What are audit red flags? ›
Too many deductions taken are the most common self-employed audit red flags. The IRS will examine whether you are running a legitimate business and making a profit or just making a bit of money from your hobby. Be sure to keep receipts and document all expenses as it can make things a bit ore awkward if you don't.
What income level gets audited the most? ›
The taxpayers most likely to be audited are those with annual incomes exceeding $10 million — about 2.4% of those returns were audited in 2020. But the second most likely group to get audited are low- and moderate-income taxpayers who claim the Earned Income Tax Credit, or EITC.
How does IRS pick who to audit? ›
Selection for an audit does not always suggest there's a problem. The IRS uses several different methods: Random selection and computer screening - sometimes returns are selected based solely on a statistical formula. We compare your tax return against "norms" for similar returns.
What gets you flagged for IRS audit? ›
Not reporting all of your income is an easy-to-avoid red flag that can lead to an audit. Taking excessive business tax deductions and mixing business and personal expenses can lead to an audit. The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.
How worried should I be about an IRS audit? ›
Audits can be bad and can result in a significant tax bill. But remember – you shouldn't panic. There are different kinds of audits, some minor and some extensive, and they all follow a set of defined rules. If you know what to expect and follow a few best practices, your audit may turn out to be “not so bad.”
How many miles can you write off without getting audited? ›
Luckily, there is no limit on the amount of mileage you can claim on taxes, granted that all mileage is related to business purposes.
How far back can the IRS audit you? ›
Typically, the IRS can include returns filed within the last three years in an audit. If it finds a "substantial error," it can add additional years but it usually doesn't go back more than the last six years.
What happens if you get audited and don't have receipts? ›
The Internal Revenue Service may allow expense reconstruction, enabling taxpayers to verify taxes with other information. But the commission will not prosecute you for losing receipts. The IRS may disallow deductions for items or services without receipts or only allow a minimum, even after invoking the Cohan rule.
Does the IRS look at your bank account during an audit? ›
The Short Answer: Yes. Share: The IRS probably already knows about many of your financial accounts, and the IRS can get information on how much is there. But, in reality, the IRS rarely digs deeper into your bank and financial accounts unless you're being audited or the IRS is collecting back taxes from you.
6 years - If you don't report income that you should have reported, and it's more than 25% of the gross income shown on the return, or it's attributable to foreign financial assets and is more than $5,000, the time to assess tax is 6 years from the date you filed the return.
Can you get audited after your return is accepted? ›
Key Takeaways. Your tax returns can be audited even after you've been issued a refund. Only a small percentage of U.S. taxpayers' returns are audited each year. The IRS can audit returns for up to three prior tax years and, in some cases, go back even further.
At what point will the IRS audit you? ›
The most comprehensive IRS audits can start later. These are called field audits, when the IRS visits you or your business. However, as a rule of thumb, if the IRS hasn't audited your return within two years after you filed it, the IRS generally won't audit your return unless there's something egregious.
What signals an IRS audit? ›
While the chances of an IRS audit have been slim, the agency may scrutinize your return for several reasons. Some red flags for an audit are round numbers, missing income, excessive deductions or credits, unreported income and refundable tax credits.
What is the most common type of IRS audit? ›
Correspondence audits are the most common IRS audit types. The Internal Revenue Service conducts this audit to request additional documentation from taxpayers.
What is the number one way to avoid an IRS audit? ›
To prevent an IRS audit for unreported income: Keep detailed records of income from all sources, including hobbies, side hustles, investments, and gambling. Income under $600 that wasn't recorded on a 1099 form still needs to be reported on your tax return.
