If you are ever audited by the IRS, it doesn’t mean you did something wrong. Sometimes all you need to do is explain your situation or fix a math error. Here’s a look at reasons you may be audited and other questions you may have about the process.
What triggers an IRS audit?
When it comes to audits, certain factors on a tax return can raise flags and increase the likelihood of it being selected. Being aware of these factors can help ensure your tax return is accurate and minimize the risk of the IRS intervening. Keep reading to find out the seven of the most common audit triggers.
1. Not reporting all income
If you choose not to report all of your earnings, it is highly likely that you will be audited. For instance, if you are a 1099 worker but did not receive all of your 1099s, you are still responsible to report the income yourself.
Your company or client(s) will be required to send the IRS a record of anything they paid you during the year. If you don’t report it on your end, it is only a matter of time before the IRS figures out you misreported your earnings.
2. Making a mathematical error or other mistakes
Errors happen to the best of us. Double-check that all numbers you enter on your return match what is on your tax forms exactly. If you notice a mistake after you’ve filed your return, it’s important to act quickly. You can file an amended return using Form 1040-X to correct errors. Be sure to include any necessary documentation to support the changes you’re making.
When you file with TaxSlayer, you don’t need to worry about getting the math right once you have the correct information entered. All calculations are done for you and are guaranteed accurate based on the info you provide.
If you need help, you can ask a tax professional your questions, get email and phone support, and be guided through the entire filing process step by step.
3. Filing with the wrong status
Claiming the correct filing status is critical for an accurate tax return. For instance, if you are single, do not claim head of household just to receive a higher standard deduction. Be sure you qualify and find the status that accurately reflects your situation.
4. Deducting too many business expenses or business losses
If you have your own business, make sure that any expenses you claim are legitimate and that you have receipts or other proof to back them up in case of an audit. It may seem easy to hide income as business expenses or losses when you’re self-employed, but the IRS will pick up on inconsistencies or percentages that don’t match up. The purchases must be normal and necessary for your type of work. For example, you can not claim the painting supplies you use for a hobby as part of your construction business expenses.
5. Using round numbers
If your income or deductions are not even numbers, do not round up. Rounding and perfectly even sums are a red flag for the IRS. They expect to see cents and decimals, not zeros, so be sure to report the numbers exactly as they appear on your tax forms.
Remember: When you file using your return is guaranteed to be 100% accurate based on the info you provide, and all the calculations are done for you.
6. Making a large donation to charity
Donating to charity is a great way to reduce your taxable income while helping out a cause you are passionate about. Taxpayers are encouraged to donate. However, if you make an unusual or unrealistic donation, you are more likely to be audited.
Make sure that you are being honest about the value. If you do make a larger than normal donation, be sure to save your receipts and submit them with your return.
7. Claiming the Earned Income Tax Credit or taking the Home Office Deduction
While taking credits and deductions are not immediate red flags for the IRS, the Earned Income Tax Credit and home office deduction are associated with a lot of fraud, so the IRS is careful to review the data related to these tax breaks. For instance, with the home office deduction, many taxpayers misunderstand the qualifications, exaggerate the size of their home office, or inaccurately report expenses. If you are taking these credits, make sure you are eligible and that you are taking them correctly.
How long does the IRS have to audit your return?
The IRS usually has three years from when you file your tax return to audit it. This is called the “three-year statute of limitations.” However, there are some exceptions:
- If you underreport your income by over 25%, the IRS has six years to audit you.
- If you don’t file a return or if you file a fraudulent return, there’s no time limit, and the IRS can audit you whenever they want.
When does an audit typically happen?
The IRS tries to audit as soon as possible after a flagged return is filed, but most audits will be of returns filed within the last two years. The length of an audit can differ based on several factors, such as the type of audit being conducted, the complexity of the issue, how easily information can be obtained, and whether you agree or disagree with the results.
How many people get audited each year?
IRS audits aren’t as common as many people think; only about 1% of people who file their taxes get audited. However, some groups are more likely to face an audit than others. For example, people with higher incomes, especially those making over $400,000, have a greater chance of being audited. Additionally, if someone reports big differences in their income year over year, claims large deductions compared to their income, or has a more complex financial situation, they might attract more attention from the IRS. Tax returns with mistakes, discrepancies, or anything that looks suspicious can trigger an audit as well.
4 ways to lower your audit risk
- Use exact numbers: Avoid rounding numbers when filing your taxes; instead, input the exact dollar amounts.
- Be consistent: Ensure that the information on your tax return matches IRS records exactly. Discrepancies can trigger scrutiny, so double-check all forms, especially if you’ve changed jobs.
- Keep good expense records: If self-employed, maintain detailed documentation of your claimed expenses to avoid issues later. Ensure your expenses are ordinary and necessary for your business to prevent underreporting income or overstating expenses.
- Follow home office deduction rules: If claiming a home office deduction, ensure your workspace is used strictly for business purposes. This deduction can raise audit risks, so make certain you meet the eligibility criteria.
How do you know if the IRS is auditing you?
If you are selected for an audit, the IRS will notify you by mail. The letter will provide a request for the specific documents they want to see and where to mail them. Depending on the reason for the audit, they may schedule an in-person interview to review your records. All the instructions and details will be in the letter you receive.
