What Will Trigger an IRS Audit?

The Internal Revenue Service (IRS) is responsible for enforcing the nation’s tax laws. As part of this responsibility, the IRS conducts audits to ensure that taxpayers are complying with these laws. While the IRS audits only a small percentage of tax returns each year, there are certain factors that can increase the likelihood of an audit.

Common IRS Audit Triggers

The following are some of the most common IRS audit triggers:

• Math errors and typos: The IRS uses automated systems to check the math and calculations on tax returns. Any errors or typos can flag a return for further review.

• High income: Taxpayers with high incomes are more likely to be audited than those with lower incomes. This is because the IRS believes that high-income taxpayers are more likely to have complex tax returns and may be more likely to make mistakes or intentionally underreport their income.

• Unreported income: The IRS receives copies of W-2s and 1099s from employers and other payers. Any income that is not reported on a tax return can trigger an audit.

• Excessive deductions: The IRS compares itemized deductions to the average deductions claimed by other taxpayers in the same income range. Taxpayers who claim excessive deductions may be audited to verify that the deductions are legitimate.

• Schedule C filers: Self-employed taxpayers who file Schedule C are more likely to be audited than other taxpayers. This is because the IRS believes that self-employed taxpayers are more likely to underreport their income or overstate their expenses.

• Claiming 100% business use of a vehicle: The IRS knows that it is rare for someone to use a vehicle 100% of the time for business purposes. Taxpayers who claim 100% business use of a vehicle are more likely to be audited to verify that the claim is legitimate.

• Claiming a loss on a hobby: The IRS allows taxpayers to deduct expenses for businesses, but not for hobbies. Taxpayers who claim a loss on a hobby may be audited to verify that the activity is actually a business.

• Home office deduction: The IRS allows taxpayers to deduct expenses for a home office, but only if the home office is used regularly and exclusively for business purposes. Taxpayers who claim a home office deduction may be audited to verify that the deduction is legitimate.

• Deducting business meals, travel, and entertainment: The IRS allows taxpayers to deduct expenses for business meals, travel, and entertainment, but only if the expenses are ordinary and necessary for the business. Taxpayers who deduct these expenses may be audited to verify that the deductions are legitimate.

• Earned income tax credit (EITC): The IRS estimates that a significant percentage of EITC claims are paid in error. Taxpayers who claim the EITC may be audited to verify that they meet the eligibility requirements.

• Dealing in cryptocurrency and other virtual currency: The IRS is cracking down on tax evasion involving cryptocurrency and other virtual currencies. Taxpayers who deal in these currencies may be audited to verify that they are reporting their income and gains correctly.

• Taking early withdrawals from retirement accounts: Taxpayers who take early withdrawals from retirement accounts may be audited to verify that they meet the eligibility requirements for the withdrawal.

How to Avoid an IRS Audit

There is no surefire way to avoid an IRS audit, but there are steps that taxpayers can take to reduce their risk of being audited. These steps include:

• Filing an accurate tax return: The best way to avoid an audit is to file an accurate tax return. This means reporting all of your income and deductions and making sure that your math is correct.

• Keeping good records: Taxpayers should keep good records of their income and expenses. This will make it easier to substantiate any deductions or credits that you claim on your tax return.

• Being aware of common audit triggers: Taxpayers should be aware of the common audit triggers listed above. By avoiding these triggers, taxpayers can reduce their risk of being audited.

• Getting professional help: Taxpayers who are not comfortable preparing their own tax returns should consider getting professional help from a tax preparer. A tax preparer can help you to avoid mistakes and ensure that your return is accurate.

What to Do If You Are Audited

If you are audited by the IRS, it is important to respond promptly and cooperate with the auditor. The auditor will request documentation to support the items on your tax return. You should provide the auditor with all of the requested documentation and answer any questions that the auditor may have.

If you disagree with the auditor’s findings, you can appeal the audit. The appeals process can be complex, so it is important to seek professional help if you are considering appealing an audit.

The IRS audits only a small percentage of tax returns each year, but there are certain factors that can increase the likelihood of an audit. By understanding these factors and taking steps to avoid them, taxpayers can reduce their risk of being audited.