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5 IRS Tax Audit Triggers to Avoid
Audits are rare, but these mistakes can raise the odds that you’ll be singled out
Rob Dobi
A letter arrives from the IRS. At first you’re excited — "My refund's here!" But when you open it, you learn that Uncle Sam has found some problems with your tax return. Uh-oh — you’re being audited!
Then you wake up. Phew.
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Fortunately, audit nightmares like that are rare in real life. For the 2014 through 2022 tax years, the IRS audited only 0.4 percent of all personal income tax returns.
Even so, you want to minimize your chances of being part of that tiny cohort. Avoiding these five mistakes can reduce the risk of the IRS pulling your tax return aside for an audit.
1. 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 return. You know those W-2 and 1099 forms you get from employers, clients and financial institutions? The IRS gets copies of them, too, and uses them to monitor tax returns for discrepancies.
When you file your tax return, the IRS runs it through an automated program to see if you reported all of the income shown on the W-2 and 1099 forms the agency received. If they detect a mismatch, you’ll get a letter (a real one, in the mail) pointing out the discrepancy and asking you to follow certain procedures to clear up the matter.
Technically, this isn’t considered an audit, but it can certainly feel like one — and it can 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. First, wait until you receive all of your W-2 and 1099 forms before filing your tax return. Employers and other payers aren’t required to mail send you these income statements until Jan. 31, yet many people complete their returns before then. Don’t jump the gun and file your taxes before receiving all of your tax documents.
Second, if you don’t receive a W-2 or 1099 that you’re expecting, or you get an incorrect form, reach out to the employer or payer as soon as possible. If you still don’t get the missing or corrected form, call the IRS at 800-829-1040 for assistance. You might have to report wage or retirement plan distribution estimates using Form 4852 instead of submitting the W-2 or 1099 with your return.
2. Making math errors
If you’re using tax software to complete your return, you probably don’t have to worry about mathematical errors because the program will do the calculations for you. However, if you’re crunching numbers yourself, there’s a greater chance of messing up.
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.
Another consequence: You might have to wait a bit longer to receive a tax refund while the IRS addresses the error.
Video: Volunteer Tax Preparer Helps Woman Recover Thousands from IRS
3. Rounding or estimating dollar amounts
This is another avoidable audit red flag. Say you rounded $403 of tip income to $400, $847 of student loan interest to $850 and $97 of medical expenses to $100. All those nice round numbers could trigger a warning in the IRS computer system.
Estimating your income or expenses could also draw unwanted attention to your return. Remember: The IRS is getting information about your taxes from other sources. If that information doesn’t match what you report on your return, the agency’s system might flag your return for a closer look.
Bottom line: Report specific and accurate dollar amounts.
4. Claiming credits you don’t qualify for
One reason the IRS audits tax returns is to uncover tax fraud, such as claiming deductions or credits you’re not entitled to. In many cases, the IRS processing system can’t tell if you’re claiming a tax break for which you don’t qualify, but sometimes it’s easy to spot.
For example, self-employed people are generally eligible for the home office deduction if they satisfy certain requirements. However, regular employees working from home typically can’t write off the costs of a home office. So, if the only income you included on your tax return was employee wages from a W-2 but you also deducted home office expenses, the IRS is going to know something is amiss.
Even if it's an honest mistake, it could result in your tax refund being reduced or the IRS sending you a bill because you owe money instead of qualifying for a refund.
5. Failing to report cryptocurrency transactions
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 has been expanding its compliance efforts in the area.
For instance, Form 1040 prominently features a question asking if you received, sold, exchanged or otherwise disposed of a digital asset during the tax year.
In addition, brokers generally must report proceeds from digital asset transactions to the IRS on the new Form 1099-DA, putting in place a checks-and-balances system for the IRS to flag suspicious returns.
Need help with your tax return? Try AARP's tax calculator, or visit AARP Foundation Tax-Aide to learn about free tax prep services by 28,000 volunteers nationwide.
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