Nobody wants to be audited by the IRS. Filing and paying taxes is already stressful enough without having to endure the accusatory scrutiny of an IRS auditor. While some tax audits are conducted at random, the majority are the result of “suspicious activity.” In other words, the Internal Revenue Service uncovered something on your tax return that looked a bit fishy. Maybe it’s just a harmless misunderstanding, but at any rate, there are certain red flags that can increase your likelihood of being targeted.
1. Mathematical Errors
Arguably, the No. 1 most common red flag that can trigger an audit, a mathematical error can happen to the best of us. For instance, maybe you made a miscalculation when adding your qualified dividends to your wages, or maybe you accidentally inverted two of the numbers when transferring your business income from your Schedule C to your 1040.
This kind of thing happens all the time, but if the IRS catches it (and they usually do), they’ll probably want to take a closer look to ensure that there’s no intentional deception on your part. When filing your taxes, make sure to triple-check every number—even if you’re e-filing.
2. Claiming a Home Office Deduction
The home office deduction enables you to deduct expenses for home-office use on your tax returns. It’s a great way to recoup some of your overhead costs if you work from home, but unfortunately, it can also incur unwanted scrutiny from the IRS. The problem is that this deduction is abused and misused quite a bit.
There are very specific requirements for the home office deduction—for example, the space must be used exclusively for business purposes. You can’t write off your spare bedroom just because it has a computer and a printer. Because this deduction is so often claimed fraudulently, honest claimants are held to greater scrutiny.
If you do have a home office, be aware that the deduction may increase your likelihood of an audit. As long as you’re claiming the deduction in accordance with the law, any audit should be resolved amicably in your favor. Work with professional CPA firms like Lalea & Black to make sure all of your tax deductions are following IRS rules.
3. Making Too Much or Not Enough Money
Whether fair or unfair, there does seem to be a direct correlation between the amount of income reported and the likelihood of an audit. According to IRS statistics, taxpayers earning between $50,000 and $75,000 are the least likely to be audited. High earners and individuals reporting no income are the most likely to be audited. If you earn six figures or higher, make sure to be especially diligent about accurate reporting.
4. Forgetting to Report Part of Your Income
Maybe you forgot, or maybe you succumbed to the temptation of underreporting some of your freelance income. For example, if you have a side gig working as a freelance writer, you may think it’s no big deal to just report your W2 employment income and ignore your meager 1099 freelance income. But if you’re a 1099 contractor, the IRS already has a record of that income. If it doesn’t show up on your tax return, the discrepancy looks highly suspicious.
5. Reporting Excessive Donations to Charity
Charitable donations qualify you for tax deductions, but it’s very important that you keep every receipt and report honestly. If a significant portion of your deduction value comes from charity, the IRS may want to take a closer look. Like the home office deduction, charity deductions are often claimed fraudulently.
An Audit Isn’t the End of the World
Just because you’re audited doesn’t mean you’re guilty. It means that the IRS wants to review your income and deductions. As long as you completed your tax return honestly and maintain a clear paper trail, the whole process should run smoothly.
So report your income, claim your deductions, and submit that tax return with full confidence. An audit isn’t the end of the world. In some cases, you may even end up with a bigger refund than you thought you qualified for.
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