An IRS audit is what happens when the IRS looks at a tax return to check the accuracy of the income reported, as well as the deductions and credits claimed. Although the great majority of taxpayers will never face an audit, there are some reasons that can raise the possibility of receiving an audit. Knowing the reasons the IRS might audit you can help you to submit accurate tax returns and lower the chances of receiving an audit.
Income Mismatches and Reporting Errors
The IRS receives documents from employers, banks, and clients between W-2, and 1099 forms, so if there’s a difference in the income you report from what they report then you will be flagged for an audit, and your tax return will be reviewed.
Math errors and missing forms and documents can result in your tax return being flagged. You might get a notice from the IRS asking for clarification and correction of missing or inaccurate documents. While these might not lead to an audit, they can cause significant hassle.
High Income Levels
People who have more money pay more taxes and, for that reason, get audited more. More complicated income returns often involve businesses, investments, or international income that can get the IRS interested.
However, just having a higher income isn't enough for the IRS to look at your income more than anyone else's. The IRS looks at how accurate and consistent your return is and not how high the dollar amount is.
Unusually Large Deductions or Credits
You can attract the attention of the IRS when you claim tax deductions and credits that are unusually high compared to other people with the same income as you. For instance, large donations, high claimable business expenses, or tax credits can lead the IRS to ask for supporting documentation to verify the expenses.
Some tax deductions are scrutinized more than others. For instance, tax deductions for home office expenses, automobile expenses, and loss-deduction from rental properties and businesses are more often found to be fraudulent.
Self-Employment and Cash-Based Income
Unlike people who earn wages, self-employed individuals and small business owners are audited more often because the IRS suspects they can underreport income and overstate expenses more easily. Such assumptions are especially true for cash-based businesses, as it is very difficult for the IRS to track and verify income from cash sales.
Frequent or Large Changes From Prior Returns
Businesses or people who report a significant decline in income or an increase in expense deductions attract the IRS' attention. The IRS looks through past tax returns and compares them with the current tax return to check for inconsistencies.
If you are concerned that your tax return is likely to raise a lot of red flags, you can reduce the likelihood of an audit and consult tax experts for personalized advice and assistance before the IRS contacts you.
