UPDATED: March 23, 2022
Getting audited by the IRS is a scary idea. It conjures up images of people in suits showing up on the doorstep to demand answers, and it might stress you out just thinking about it. But have you ever wondered what actually triggers an IRS audit? Is it poor math skills? Taking too many deductions? Giving too much to charity? Errors on my credit report? Here are the most common red flags that tip off the IRS to audit your taxes.
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What Does it Mean to get an IRS Audit?
The IRS can issue an audit if they find something in your taxes that doesn’t align with what they expected to see. The IRS may audit you in two ways:
- Mail audits: If an issue is minor, the IRS may send you a letter asking for specific information or documentation to back up an element of your return. They might question your income or what uniquely qualifies you to take a particular deduction or tax credit. As long as you submit the requested information timely, it might not turn into anything more serious.
- Office or field audits: If the IRS calls you into the office or comes to visit your residence, it’s referred to as an office or field audit, depending on location. These types of audits are infrequent and typically only happen in situations where tax returns are complicated.
If you receive an audit notification, it’s best to respond timely, be truthful, and pull in a tax or legal professional if necessary to help you navigate the system.
Here are six common reasons the IRS would initiate an audit:
Being Bad at Math
It was acceptable in high school algebra, but “I'm not good at math” doesn’t cut it with the IRS. You could end up with a fine or audit simply by forgetting a “0” on the end of a number or typing “2” instead of “3”. Even if it was an honest mistake.
If you’re really not sure you can bust out the mathematician chops (or find a good calculator), it’s best to use a tax preparation program or a tax professional. No matter which option you choose, it’s imperative to double-check your numbers before you send in the final version of your taxes.
Not Reporting All of Your Income
This can be especially tricky for people with multiple sources of income. If you have a full-time job for which you receive a W-2 and one or many side hustles, you need to report all earned income. That means keeping track of what you earned for each side gig, including those where you were paid in cash.
And maybe you really did forget about that $750 cash payment you received for a local freelance project. But in the case of independent contractor relationships, the IRS is getting their information from two sources: you and the company that paid you.
Any income greater than $600 paid from a business to a contractor is reported on form 1099. Both you and the IRS will receive a copy from the business, and it’s up to you to be truthful and report it on your end. If there’s a disconnect between what you report and what the business says they paid, you could land face first in an audit.
Being Too Charitable
Charitable giving is an excellent use of extra money. But trying to get away with claiming more charitable giving than you actually did is dishonest and can get the IRS on your case.
If you give 10% of your income to qualified charities, you’re probably in the clear. But if your income last year was $50,000 and you gave $25,000 to charity, you have a higher likelihood of being flagged for an audit.
Taking Too Many Deductions
For small business owners, daily life can turn into a constant game of “can I deduct this?” And while there are probably a lot of things that can be deducted, if you do too much and it’s not directly applicable to your business or trade, you might have a problem.
If you’re a web designer, you can reasonably write off the software products you use to work. But you might not be able to get away with deducting the guitar you bought that helps you jam and de-stress between client jobs.
Business owners need to be honest about deductions. And it’s probably wise to change the question of “can I deduct this?” into “is this a reasonable deduction in the scope of my business?”.
Showing Too Many Losses on Schedule C
Business owners can reasonably show losses as it relates to operating their business. But sometimes, it can be tempting to try and show so many losses that you don’t need to pay anything in taxes. And while that might happen, especially for early-stage businesses, it’s not practical to show excessive losses on a Schedule C for years and years.
As with general business deductions, be honest and make sure they’re related to the running of your business. Yes, deducting your new bike as an expense would increase the loss you’re showing, but it also encourages the IRS to dig in and flag your returns.
Deducting the Home Office
The home office deduction has been a popular one for those who are self-employed or independent contractors. And those who are eligible love to use the deduction to offset some of the tax burdens of being a business owner.
While the home office deduction allows you to write off a percentage of your home that’s solely for business use, trying to claim too much is where things get fishy. Be sure that your home office is the principal place of your business dealings and that you’re regularly conducting business there. Be truthful and only include space that’s for business use to avoid an audit.
The Bottom Line
As long as you’re honest about your income, expenses, and deductions on your tax return, you’ll likely never have to deal with an audit. If your returns were flagged for an audit, be sure to respond to IRS requests as soon as possible. Remember, unpaid taxes may affect your credit score. And pull in the appropriate professionals to help as needed.