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10 IRS Tax Audit Triggers to Avoid

Audits are rare. Here’s how to keep them that way

spinner image a giant hand with an audit stamp looms over the silhouette of a man surrounded by tax forms
Rob Dobi

Whether it’s an impersonal exchange of forms and documents through the mail or a face-to-face grilling at an Internal Revenue Service office, nobody wants to go through an IRS audit. Just the thought of the tax agency picking your tax return apart can make you queasy. While some returns are selected randomly for an audit, one way to decrease your chances of facing this unpleasant experience is to avoid as many IRS audit red flags as possible.

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All kinds of oddities on your tax return might draw unwanted attention from the IRS. In some cases, it’s simply a sloppy mistake on your part. However, it can also be something totally surprising and beyond your control, like claiming a certain tax break or the amount of income reported.

Video: Top Ways to Become a Target for the IRS

Although the list is potentially endless, here are 10 common audit red flags that can boost the chances of your tax return being pulled aside for a second look. There’s no guarantee you’ll escape an audit with this information in hand, but you might be able to use it to keep the odds in your favor. And if your return is selected for an audit, you might be more at ease knowing that it wasn’t your fault.

1. Making too much money

While it’s not a bad problem to have (since it means you’re rich), millionaires have a much greater chance of being audited. This is especially true today, thanks to additional IRS funding from the Inflation Reduction Act of 2022 that’s being used to increase enforcement actions against higher-income taxpayers.

To illustrate the point, let’s take a look at some statistics from the 2018 tax year (the most recent year for which the IRS has started all enforcement activities and issued data). The IRS audited only 0.3 percent of all personal income tax returns for the year. However, the audit rate jumped to 1.2 percent for people who reported between $1 million and $5 million of income — and it goes up from there. The tax agency audited 2.2 percent of returns reporting between $5 million and $10 million of income, while the audit rate surged to 9.2 percent for people reporting income exceeding $10 million.

That’s not to say that you should try to make less money each year. But if you’re extremely successful (or lucky) and earn a boatload of money, don’t be too shocked if the IRS decides to audit your return.

2. Failing to report taxable income

You’re practically inviting a response from the IRS if you don’t report all of your taxable income on your tax return. You know those W-2 and 1099 forms you get from employers and other people who pay you during the year? Well, the IRS gets a copy of those forms, too.

When you file your tax return, the IRS runs it through a cross-checking program to see if you reported all the income shown on the W-2 and 1099 forms the tax agency has with your name on it. If a mismatch is detected, you’ll get a letter in the mail from the IRS pointing out the discrepancy and asking you to follow additional procedures to clear up the matter. Although this technically isn’t considered a correspondence “audit” for purposes of the audit rate statistics, it can certainly feel like one … or lead to a full-blown audit if the IRS doesn’t trust your numbers.

You can do a couple of things to help prevent this situation from arising. First, wait until you receive all your W-2 and 1099 forms before filing your tax return. Employers and other payers aren’t required to get your W-2 and most 1099 forms to you until Jan. 31, and many people complete their returns before that date, which can be a mistake. Don’t jump the gun and file your taxes if you don’t have all your tax documents yet.

Second, if you don’t receive a W-2 or 1099 form that you’re expecting, or get an incorrect form, reach out to the employer or payer as soon as possible. If you already did that but still haven’t received the missing or corrected form, call the IRS at 800-829-1040 for assistance. Ultimately, you might have to estimate the W-2 or 1099 amounts to report using Form 4852.

3. Math errors

Math errors fall under the “stupid mistake” category. If you’re using tax software to complete your return, you probably don’t have to worry about math errors because the software will do the calculations for you. On the other hand, it’s very easy to mess up the calculations if you’re filing a paper return.

And regardless of whether they’re intentional, math errors can cause your return to be flagged for additional scrutiny. If the IRS finds a miscalculation, it will fix the error and send you a notice of any adjustments to your tax return. You’ll have 60 days to object to any increased tax liability.

The worst part is that you might have to wait a bit longer to receive a tax refund while the IRS pulls your return to fix the mistake.

4. Rounding or estimating dollar amounts

Another easily avoidable audit red flag is rounding or estimating dollar amounts on your tax return.

Say, for instance, you round $403 of tip income to $400, $847 of student loan interest to $850, and $97 of medical expenses to $100. The IRS is going to see all those nice round numbers and think you’re making them up.

Estimate Your Taxes

AARP’s tax calculator can help you predict what you’re likely to pay the IRS.

And if you actually make up numbers by, say, estimating your income or expenses, that’s another way to draw unwanted attention to your return. Remember, the IRS is getting information about your tax situation from other sources. If that information doesn’t match what you report on your return, the IRS computers are going to spit out your return for a closer look.

Plus, if you’re rounding or estimating certain dollar amounts, the IRS might start questioning everything else on your return, too. And that could lead to a much more intense audit. Fortunately, it’s easy to avoid this situation — just don’t ever round or estimate dollar amounts on your tax return.

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5. Claiming refundable credits

Refundable tax credits can drop your tax bill below zero and generate a tax refund. For instance, if your pre-credit tax bill is $1,000, a $1,200 refundable credit will trigger a $200 tax refund.

On the other hand, the best you can hope for with a nonrefundable tax credit is a $0 tax bill. For example, if you owe $1,000 in tax before applying a $1,200 nonrefundable credit, your tax bill will be knocked down to $0, but you won’t get a refund (i.e., you essentially lose $200 of the credit).

Because they’re often used to obtain fraudulent tax refunds, claiming refundable tax credits on your tax return can increase the odds of being audited. This includes the earned income tax credit (EITC), child tax credit, health insurance premiums credit and American Opportunity tax credit.

For example, as noted earlier, the IRS only audited 0.3 percent of all personal income tax returns for the 2018 tax year. However, the audit rate tripled, to 0.9 percent, for people who claimed the EITC on their return for that year. That translates into more than 150,000 additional audits just for people claiming the EITC.

If you’re legitimately eligible for a refundable credit, then you should absolutely claim it. Just don’t be too surprised if your tax refund is delayed because your return was pulled aside for a closer look.

6. Taking unusually large deductions

The IRS has been collecting taxes for a long time, so it has a pretty good idea of what to expect in terms of deductible expenses for taxpayers at your income level. So, if you claim a large deduction that doesn’t make sense for someone in your income range, the IRS computers are going to flag that deduction.

For example, if you make $50,000 during the year, the IRS is going to be suspicious if you claim $20,000 in donations to charity. While that might be a typical charitable deduction amount for someone with a high six-figure income, it’s quite unusual for people earning $50,000 per year.

But once again, if you do have a legitimate deduction, don’t be afraid to claim it even if it seems high. Just make sure you can back it up with receipts or other documentation if the IRS questions it.

7. Claiming credits you clearly don’t qualify for

One reason the IRS audits tax returns is to uncover tax fraud, such as claiming tax deductions and credits you’re not entitled to. In many cases, the IRS computers can’t tell if you’re claiming a tax break for which you don’t qualify. But sometimes it’s easy to spot.

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For example, self-employed people are generally eligible for the home office deduction if they satisfy certain requirements. However, regular employees working from home can’t write off the related costs of a home office. So, if the only income included on your tax return is employee wages reported on a W-2 form, the IRS is going to know that something is wrong if you also claim the home office deduction.

Even if you’ve made an honest mistake in claiming a tax break you’re clearly not eligible for, the IRS is still going to pull your return for further examination. This could ultimately result in your tax refund being reduced or the IRS sending you a bill.

8. Reporting business expenses

If you’re a self-employed sole proprietor (including just having a side gig), your business profits and losses are reported on Schedule C (Form 1040). However, the IRS has learned from experience that many small-business owners aren’t always accurate when it comes to reporting business income and expenses. As a result, the odds of being audited go up if you file a Schedule C with your return.

This is especially true for business owners who typically have a lot of cash transactions, such as cabdrivers, food truck operators, hairstylists and the like. Audits of these types of businesses are often aimed at discovering unreported income.

Self-employed people also have a greater tendency to inflate deductible business expenses, such as for travel, meals, office supplies and the like. So the IRS pays close attention to business expenses reported on Schedule C. Deducting 100 percent of the cost of operating a car or truck used for business is also a sign that something is off, because the IRS knows that the vast majority of self-employed people will drive their vehicle for personal use at least some of the time.

The key for self-employed taxpayers is to keep extremely accurate records of your income and expenses. That way, you’ll be prepared if the IRS questions any of your reported figures.

9. Deducting expenses for a hobby

A related audit red flag is reporting business expenses for something that’s just a hobby , not an actual business. If you’re earning money from a hobby (e.g., making jewelry in your spare time), you can’t deduct the costs associated with that activity (although the income is taxable). So, if the IRS suspects that you’re deducting expenses related to a hobby, you can expect to hear from them.

How do you know if your money-making activity is an actual business or just a hobby? Basically, a business is operated to make a profit, while a hobby is for pleasure or recreation. The determination of whether you’re running a business is made on a case-by-case basis and depends on multiple factors, such as whether you:

  • Carry out the activity in a businesslike manner (e.g., keep complete and accurate books and records).
  • Put in the time and effort needed to make a profit.
  • Actually make a profit in at least some years.
  • Depend on income from the activity for your livelihood.
  • Have losses that are normal for the start-up phase of your type of business.
  • Change your methods of operation to improve profitability.
  • Have the knowledge needed to carry out the activity as a successful business.

10. Receiving or selling cryptocurrency

Data collected by the IRS suggests that the noncompliance rate for reporting taxable income from trading digital assets such as cryptocurrencies and non-fungible tokens (NFTs) could be as high as 75 percent. That’s why the IRS keeps a close eye on transactions involving digital assets and is expanding its compliance efforts in the area. In fact, the tax agency considers digital asset compliance a priority for the 2024 fiscal year and recently hired outside experts to help.

There’s also a question at the top of Form 1040 specifically asking if you received, sold, exchanged or otherwise disposed of a digital asset at any time during the tax year. Once regulations are issued, the requirements for reporting certain transactions involving digital assets will be stiffer, too. This is further evidence that the IRS is very serious when it comes to the taxation of income from digital assets.

Expect all this additional scrutiny to result in higher audit rates for people dealing in virtual currencies and other digital assets.

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