This tax season, with a boost in funding, the IRS said it’s adding staff and technology to “reverse the historic low audit rates” on high-income taxpayers. Tax season can already be a stressful time, between having to navigate countless forms and compiling all of the correct information, and the threat of an audit can ratchet up the stress of tax season even more.
According to the IRS, though, an audit is simply a review of your accounts “to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”
Whether you’re among the “high-income, high-wealth individuals” the IRS is targeting this year, your chances of being audited are pretty slim: Of the roughly 165 million returns the IRS received in 2022, approximately 626,204, or less than 0.4%, were audited.
A review of a federal tax return can be triggered at random, but certain behaviors are more likely to be flagged than others. According to the IRS, audits are determined by a “statistical formula” that compares your returns against other taxpayers.
Here are common mistakes that generate more scrutiny from the IRS and what you can do to avoid them.
1. Your return is incomplete
“There’s no one single thing that automatically triggers an audit but mismatched documentation is the most common reason why you’ll get a letter from the IRS,” Jo Willetts, director of tax resources at Jackson Hewitt, told CNET.
It can be as simple as a missing form, Willetts said, “and often it happens to people who rush around at the last minute.”
The federal government offers a variety of credits, like the child tax credit, which allows parents to claim up to $2,000 per qualifying child.
But you have to show you legitimately qualify for these benefits, Willetts said.
“If, last year, you claimed no child tax credit and this year you claimed three kids and they’re not babies, it’s going to trigger a letter from the IRS,” she said.
That doesn’t always mean you’ve made a mistake or are trying to fool the government. You might have had a child in May 2023, and the IRS is working off your 2022 return.
2. You messed up the math or other information
While simple math errors don’t usually trigger a full-blown examination by the IRS, they will garner extra scrutiny and slow down the completion of your return. So can entering your Social Security number wrong, transposing the numbers on your address and other boneheaded blunders.
Filing electronically cuts down on these foul-ups by pulling a lot of information from previous returns and letting you load your W-2s or 1099s directly into the system.
Using a professional tax preparer is also a good bulwark against mistakes and miscalculations.
3. You’re self-employed and don’t report deductions accurately
“If you work for yourself and have legitimate business expenses, you should feel empowered to take them,” said TurboTax tax expert Lisa Greene-Lewis. “Just make sure you have receipts and documentation to back it up.”
If you claim the home-office deduction, it has to be a space used “exclusively and regularly for your trade or business” — not the dining-room table.
If you claim transportation expenses, you’ll need to document the mileage used for work. If you deduct 100% of your personal vehicle as a business expense, it’s going to raise a flag, Greene-Lewis said.
Being diligent is especially true when deducting business meals. In 2021 and 2022, business meals could be 100% deductible, but now, that limit is back down to 50%.
“But you have to document who you are with, what the purpose of the meeting was, the date of the meal and so on,” Greene-Lewis said. “And, of course, keep your receipts.”
4. You claim too many business expenses or losses
You’re required to file a Schedule C form if you have income from a business. But it complicates your return and can make you more likely to be contacted by the IRS.
Greene-Lewis encourages taxpayers to claim every deduction they’re legitimately entitled to but to be extremely diligent in justifying those deductions, with details and supporting paperwork.
By and large, the IRS algorithm is looking for deductions that are outside the norm for people in your profession: If you’re a patent attorney but your travel expenses are three times what other patent attorneys claim, it could lead to closer inspection.
And If you’ve taken a loss on your business for several years in a row, the IRS might want to make sure your business is above board.
According to Thomas Scott, a tax partner at CPA firm Aprio, small business owners who keep sloppy records often make frivolous deductions.
“When the business owner makes up expenses and deductions, they tend to stick out,” Scott told CNET. “Under an audit, the IRS will require support and proof of deductions and if not provided these deductions will be disallowed.”
On a similar note, Scott added, “businesses that try to take incentives and credits that they don’t qualify for may cause a red flag.”
5. Your charitable deductions are outsized
If you itemize your deductions, you can claim cash donations to recognized charities — as well as the value of a donated car, clothes and other property. But the IRS notices if these donations seem out of line with your income.
The agency’s computer program, the Discriminant Information Function system, continuously scans returns for such anomalies.
“If you claimed a charitable deduction that’s, like, half your income, it’s going to catch their eye,” Greene-Lewis told CNET.
The IRS puts caps on how much of your adjusted gross income can be deducted as charitable contributions. There are some forms of donations that can exceed this limit but doing so is likely to draw scrutiny, so you better have all your paperwork in order.
6. You have undeclared income
This is the biggie: Employers are required to file a W-2 with the IRS that reflects your earnings, or 1099s in the case of freelancers and contractors who earn more than $600.
The IRS automatically checks to see that your reported income matches up to what your boss submitted. It also gets notified of interest or earnings from savings accounts, investments and stock trades, too — as well as large gambling wins, inheritances and almost any other kind of income.
And if you fail to report capital gains on cryptocurrency trades, it could trigger an audit.
Even if you work in a cash business — say, as a waiter or babysitter — unclaimed income can catch up with you.
“If someone is bringing their child to you to care for, they’re probably claiming your service on their taxes. So you need to make sure it all aligns,” says Willetts. “Even a small business like a house painter will require you to be bonded. That will eventually cross the IRS’s desk.”
And government agencies talk to each other, she added. If you declare $20,000 in income on your tax return but, when you apply for a home loan backed by the Federal Housing Administration, you put down $80,000, it will raise a flag.
According to Aprio’s Thomas Scott, small-business owners who don’t keep good records also tend to underreport, a major audit risk.
“Because the business owner hasn’t kept up with their income for the entire year, when it’s time to file their taxes they tend to estimate,” Scott says. “The problem with this approach shows up because most of the income earned has been reported to the IRS on a Form 1099. The IRS can match the income reported on the owner’s return to the income reported on Form 1099s.”
The IRS accepts tips from concerned citizens, so a disgruntled employee or aggrieved co-worker may be only too happy to report you for tax fraud, especially since the agency’s 2006 Whistleblower Program increased incentives to potentially between 15% and 30% of the proceeds that the IRS collects.