*The following article was updated in March 2024*
Very few things spark fear in a person more than the receiving a notice from the Internal Revenue Services (IRS) that says you’re being audited. While being audited is a scary prospect, it’s actually a common practice and really just a way for the IRS to make sure your previous tax returns do not have discrepancies in what you reported. Many people fear this practice because they are unsure of what the IRS is looking for in the audit. Let’s look at some of the most common reasons for an IRS tax audit.
Failing to Report Income – The biggest way to trigger an IRS audit is to not report all you’re income. This is especially true if you are self-employed. Every bit of income you receive that’s reported on a Form 1099 must be reported on your tax return. And if you try to keep it off your return, the IRS will likely find out since they already received a copy of 1099 from the business that paid you. If you fail to disclose the income, especially on multiple occasions with several Form 1099s, your likelihood of an audit is great.
IRS Computer Score – The IRS had a computer system that every tax return is run through. The system is designed to detect anomalies in tax returns and compares the returns against other similar ones. Some of the things the system looks for are duplicate information reported, such as two people reporting the same deduction or credit. For example, two parents both report their child as a dependent on their return. The computer system picks up on these discrepancies and will flag the return for a potential audit.
You Have Several Itemized Deductions – The IRS expects taxpayers to claim several deductions, with some of the most common being mortgage interest, student loan interest, child dependent tax credits, retirement contributions, and charitable donations. However, one thing that will trigger an audit is the reporting of several itemized deductions on a tax return. For example, claiming $7,000 in charitable donations when you only make $30,000 may raise a red flag with the IRS.
Other audit triggers, especially for individuals who are self-employed, are claiming a home office or the business use of a vehicle. Hobby-related deductions, or when a taxpayer is deducting expenses they spent on a hobby and not one that earns income, is also a strong audit trigger.
The Earned Income Tax Credit – The Earned Income Tax Credit (EITC) is a benefit for working people with low to moderate-income. The EITC reduces the amount of tax you owe and may give you a refund, and increases with the number of children dependents you claim on your tax return. Claiming the EITC is an automatic trigger for an audit because you must qualify for the credit under certain requirements. If those requirements are not met, you will get a notice of an audit.
Amended Returns – An amended return often serves as a red flag to the IRS, especially when taxpayers try to amend their return from a prior year as quickly as possible.
IRS audits can be a scary prospect, especially when you don’t know what the IRS is looking for when they start the process. Don’t try to navigate an IRS audit by yourself. Working with an experienced tax professional or attorney can save you time and money, and help put your mind at ease during such a challenging process.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.
