12 Common IRS Audit Triggers
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Math Errors and Typos: The IRS uses automated programs to check for errors in math and calculations on tax returns. Any discrepancies can flag your return for further review.
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High Income: Individuals with higher incomes are more likely to be audited by the IRS. This is because the IRS believes that high-income earners have a greater potential for tax avoidance.
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Unreported Income: The IRS receives copies of your W-2s and 1099s, and they automatically compare this data to the amounts you report on your tax return. Any unreported income could trigger an audit.
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Excessive Deductions: The IRS compares your itemized deductions to the average total deductions for a given item claimed by other taxpayers in your income range. If your deductions appear to exceed these averages, you may be subject to further scrutiny.
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Schedule C Filers: The IRS pays close attention to businesses that operate primarily with cash, especially those reporting a loss. They have extensive experience auditing self-employed taxpayers who underreport income or overstate expenses.
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Claiming 100% Business Use of a Vehicle: The IRS knows that it’s rare for someone to use a vehicle they own 100% of the time for business purposes. Claiming 100% business use of a vehicle will almost certainly draw IRS attention.
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Claiming a Loss on a Hobby: Writing off expenses for a business is acceptable, but you cannot portray your hobby as a business. For the IRS to consider it a business, you must have a reasonable expectation of making a profit.
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Home Office Deduction: To claim the home office deduction, you must use a portion of your home “regularly and exclusively” for business. The IRS scrutinizes home office deductions, especially for individuals earning wages.
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Deducting Business Meals, Travel, and Entertainment: The IRS closely examines these deductions due to past abuse. Keep careful records, including receipts and documentation of who was in attendance and the specific business purpose.
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Earned Income Tax Credit (EITC): The IRS estimates that a significant percentage of EITC claims are paid in error. They scrutinize EITC claims to prevent fraud. If you claim the EITC, document how you meet the eligibility requirements.
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Dealing in Cryptocurrency and Other Virtual Currency: The IRS has created a compliance campaign focused exclusively on cryptocurrency transactions to address potential fraud opportunities.
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Taking Early Withdrawals from Retirement Accounts: These withdrawals must meet certain criteria to avoid taxation and penalties. The IRS monitors unreported early retirement account withdrawals that don’t meet the criteria.
How Far Back Can the IRS Audit?
The IRS can generally audit tax returns for the past three years. However, if errors are detected, they can go back even further, though usually not more than six years.
How Long Should You Keep Tax Records?
It’s recommended to keep tax returns and records for at least three years, and some experts suggest keeping them for up to six or seven years in case the IRS goes back further than three years during an audit.
What Should You Do if You’re Audited?
If you receive an audit notice from the IRS, respond promptly and cooperatively. Often, audits can be handled by mail without an in-person meeting. If the audit is complex or involves a significant amount of money, consider consulting with a tax professional.
What the IRS is actually looking for that could trigger a tax audit
FAQ
What is likely to trigger an audit?
What are red flags for IRS audit?
What determines if you get audited?
Who is most likely to get audited by IRS?
What are the most common audit triggers?
One of the most common triggers for an IRS audit involves simple math. When you receive a W2 from your employer or 1099 for another income source (e.g. freelance work, investment income, etc.), the IRS receives a copy, too. Assume you receive a 1099-NEC for $10,000 of independent contractor income.
What are some common IRS audit triggers?
One of the most common triggers for an IRS audit involves simple math. When you receive a W2 from your employer or 1099 for another income source (e.g. freelance work, investment income, etc.), the IRS receives a copy, too. Assume you receive a 1099-NEC for $10,000 of independent contractor income.
What is the purpose of audit triggers?
But the truth is, IRS audit triggers only affect a VERY small number of tax returns, and usually the auditors are satisfied by providing the documentation to back up your figures. This is why organizing and holding on to your relevant records and statements is so important, as we noted in the first part of this tax series.
What are some top audit triggers for Form 990?
There are two avenues frequently seen where UBI can trigger an audit. One is acknowledging UBI greater than $1,000 on the Form 990 without filing a required Form 990-T. The âTâ return is where the income and expenses for UBI activity is reported and taxes calculated and paid.