IRS audit: What triggers it and what are red flags that increase the chance of being audited

by Elisabeth Buchwald

As you work on your tax return, you may be wondering if there’s anything you can do to avoid being audited.

When you’re audited by the Internal Revenue Service, it means your return was selected from a batch of returns for a closer inspection. Sometimes returns are selected at random for a closer review.

But the IRS can’t afford to scrutinize everyone’s tax returns. That’s why the agency uses an algorithm to screen for potential red flags in returns that need to be corrected to reduce the number of underpayments to the IRS and increase tax revenue.

But if you can fix some of those red flags that may trigger an audit before you submit your return, you may be able to avoid getting audited.

What triggers an IRS audit?

A lot of audit notices the IRS sends are automatically triggered if, for instance, your W-2 income tax form indicates you earned more than what you reported on your return, said Erin Collins, National Taxpayer Advocate at the Taxpayer Advocate Service division of the IRS.

That’s why Collins recommends taxpayers ensure the income they report on their returns is consistent with the income that’s stated in official income tax documents like a 1099 or W-2.

“We find a lot of taxpayers take their last paystub (of the year) and use that number,” she said. But they can run into problems because that last paystub may not cover their typical pay period.

She also recommends parents discuss who will be claiming a child on their return if they file separate returns. They should also ensure additional caretakers like a grandparent don’t try to claim a child on their return if they don’t meet the IRS’ requirements for doing so. Otherwise, an audit may also be triggered if multiple people try to claim the same child as a dependent on their returns.

While not technically an audit, Collins said, the IRS sent a majority of notices in the past couple of years to taxpayers who have math errors. These were unusually high because taxpayers didn’t properly adjust their income after receiving enhanced child tax credits or stimulus checks.

Michael Steffany, a senior tax attorney at Withersworldwide, said in his experience, “the IRS concentrates its efforts on those items most likely to result in a large amount of additional tax due.”

“We continue to see high net worth taxpayers, as well as taxpayers with non-U.S. income and foreign entities, be a particular point of concentration,” he added.

How does the IRS choose who to audit?

The IRS says audits can also commonly be triggered through a random selection process in which a computerized system compares your return “against ‘norms’ for similar returns,” the IRS said in an online post.

Another trigger for an audit is if the information on your return is connected to someone else’s, such as a business partner or investor, who is being audited.

Who gets audited by the IRS the most?

In terms of income levels, the IRS in recent years has audited taxpayers with incomes below $25,000 and above $500,000 at higher-than-average rates, according to government data.

Treasury Secretary Janet Yellen and acting IRS Commissioner Douglas O’Donnell have said that the nearly $80 billion the IRS will be receiving from the Inflation Reduction Act won’t be put toward increasing audits above historical levels for taxpayers who earn less than $400,000 a year.

Steffany said the influx of funds is likely to increase the number of audits for high earners, which has fallen in recent years. Collins said that’s due to the funding issues the IRS experienced.

Odds of being audited by the IRS

Last year, 3.8 out of every 1,000 returns, or 0.38%, were audited by the IRS, according to a recent report using IRS data from Syracuse University’s Transactional Records Access Clearinghouse.

Citation References

7 Reasons the IRS Will Audit You

by Tina Orem

What is an IRS audit?

An IRS audit is an examination or review of your information and accounts to ensure you’re reporting things correctly, following the tax laws, and that your reported tax amount is correct. In other words, the IRS is simply double-checking your numbers to make sure you don’t have any discrepancies in your return.

Sometimes state tax authorities do audits, too. If you’re telling the truth, and the whole truth, you needn’t worry. Nothing is inherently sinister about an IRS audit or state audit. However, people who are consciously cheating the system do have reason to be concerned.

Why the IRS audits people

The IRS conducts tax audits to minimize the “tax gap,” or the difference between what the IRS is owed and what the IRS actually receives. Sometimes a tax return is selected for audit at random, the agency says. Other times, the IRS might audit you because your return involves transactions with another audited return — such as an investor or business partner. ^[1] But the IRS often selects taxpayers based on suspicious activity.

Here are seven of the biggest red flags likely to land you in the IRS audit hot seat.

1. Making math errors

When the IRS starts investigating, “oops” isn’t going to cut it. Don’t make mistakes. This applies to everyone who must file taxes. Don’t accidentally write a 3 instead of an 8. Don’t get distracted and forget to include that final zero. Mistakes happen, but make sure you double- and triple-check your numbers if you’re doing your own taxes. You’ll be hit with fines regardless of whether your mistake was intentional. If your math is a little shaky, using good tax preparation software or a tax preparer near you can help you avoid unfortunate errors that can lead to an IRS audit.

2. Failing to report some income

Easy way to score an IRS audit? Don’t report part of your income.

Let’s say you’re employed herding sheep for Farmer Joe and you pick up a little extra cash writing articles for a sheep-shearing publication on a freelance basis. You may be tempted to submit only the W-2 form from your herding job and keep the freelance writing income on your Form 1099 under wraps.

A 1099 reports nonwage income from things such as freelancing, stock dividends and interest. One type of 1099, the 1099-NEC, typically reports amounts paid to independent contractors.

Well, guess what? The IRS already knows about income listed on your 1099 because the publication sent it a copy, so it’s only a matter of time before it discovers your omission.

3. Claiming too many charitable donations

If you made significant contributions to charity, you’re eligible for some well-deserved deductions. This bit of advice is common sense: Don’t report false donations. If you don’t have the proper documentation to prove the validity of your contribution, don’t claim it. Pretty simple. Claiming $10,000 in charitable deductions on your $40,000 salary is likely to raise some eyebrows.

4. Reporting too many losses on a Schedule C

This one is for the self-employed. If you are your own boss, you might be tempted to hide income by filing personal expenses as business expenses. But before you write off your new ski boots, consider the suspicion that too many reported losses can arouse. The IRS may begin to wonder how your business is staying afloat. IRS Publication 535 has details.^[2]

5. Deducting too many business expenses

Along the same lines as reporting too many losses is reporting too many expenses. To be eligible for a deduction, purchases must be 1) ordinary and 2) necessary to your business. A professional artist could probably claim paint and paintbrushes because such items meet both requirements. A lawyer who paints for fun and doesn’t turn a profit on the works may have a problem. The questions to ask are: Was the purchase common and accepted in the trade or business? Was it helpful and appropriate for the trade or business?

6. Claiming a home office deduction

Home office deductions are rife with fraud. It may be tempting to give yourself undeserved deductions for expenses that don’t technically qualify. The IRS narrowly defines the home office deduction as reserved for people who use part of their home “exclusively and regularly for your trade or business.” That means a home office can qualify if you use it for work and work only. Occasionally answering emails on your laptop in front of your TV probably doesn’t qualify your living room as a deductible office space. Claiming a home office deduction may be more defensible if you have set off a section of your home strictly for business purposes. Be honest when you report expenses and measurements.

» MORE: See some other tax deductions for self-employed people

7. Using nice, neat, round numbers

In all likelihood, the numbers on your 1040 form and other tax documents will not be in simple, clean intervals of $100. When making your calculations, be precise and avoid making estimations. Round to the nearest dollar, not the nearest hundred. Say you’re a photographer claiming a $495.25 lens as a business expense; round that to $495, not to $500. An even $500 is somewhat unlikely, and the IRS may ask for proof.