IRS Red Flags That Trigger Audits
This tax season has begun, and the IRS has warned that filing mistakes may cause delays amid staffing shortages and a massive backlog. Tax experts say that filing electronically is your best chance for a quick refund but other moves may attract the IRS’s attention.
The IRS closed nearly half a million audits in the fiscal year 2020, or about 0.29% of the roughly 157 million individual income tax returns it received, according to agency data released.
The IRS has a three-year statute of limitations for auditing a tax return, but there’s no limit on the amount of time they may pursue fraud or non-filers. One of the first cues may be claiming too many credits or deductions compared to your income, tax experts say. Here are the IRS red flags that trigger audits and some pointers as to how you can be mindful of them.
Audit Triggers
The Internal Revenue Service uses software to assign numeric scores to each tax return, with higher scores more likely to set off audit alarms.
This system calculates the amount of each deduction and credit that taxpayers can claim based on income. If a taxpayer’s write-offs fall outside the system’s calculated range, the score may increase or decrease depending on whether the number of deductions exceeds what the taxman allows. For example, if a taxpayer earning $90,000 claims $60,000 in charitable deductions, the system will flag this as suspicious.
if the forms you submit do not match your reported income, an automated notice will be triggered, which may lead to further questions from the IRS.
For example, the IRS might receive your full-time wages on Form W-2, contract earnings on Form 1099-NEC. But to avoid underreporting, you should double-check these forms with a free IRS transcript before filing. You can get a copy of your tax transcripts by setting up an e-services account at the IRS website.
Top IRS Red Flags that Trigger Audits
- Unreported Income
- Rounded Numbers
- Refundable credits like the earned income tax credit
- Excessive write-offs compared with earnings
Write-Off Red Flags
Advance child tax credit or stimulus payment errors are likely to be caught by the IRS this year, but other write-offs tend to be a recurring reason. As an example, the earned income tax credit—a tax benefit for low- to middle-income families—is valuable because it is refundable; you may still get a refund even if your income is too low to owe taxes.
Claiming the earned income tax credit as a self-employed person is a give-away that you haven’t been reporting all your income. You need to have receipts for income, not just deductions. Self-employed taxpayers must be cautious when making deductions for a home office or a vehicle because the IRS typically disallows any deductions that can be classified as personal, rather than business expenses.
When you’re reporting income and expenses, be accurate and precise. Imprecise numbers are a tipoff that you have not done the work necessary to accurately report your revenue and expenses.
Burden of Proof
You should not be afraid to face those tax problems if you can back up your claims with proper documentation. “The IRS is not the enemy”.
Bottom line
While the chances of the IRS auditing you are slim, there are still several reasons why your return may get flagged by the IRS’ system, which could then in turn trigger a notice for the IRS to audit you. Signs of a possible audit include unusually high write-offs compared with revenues, unreported income, refundable tax credits, and more. Remember that when it comes to dealing with the IRS, you are only as good as your supporting documents. So you should be mindful of these IRS red flags that trigger audits.
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