Being audited by the IRS can be a stressful and confusing experience for many taxpayers. Some key questions that may arise include: What actions commonly trigger an audit? What can I do to avoid an audit? And what should I do if I receive an audit notice?
In the opening section below, we will briefly overview some of the most common red flags that may lead to an IRS audit. The remainder of the article will then dive into more details on audit triggers, tips to reduce your audit risk, and steps to take if you do get that dreaded letter from the IRS.
Common Audit Triggers
According to IRS data, the most frequent triggers for an audit include:
- Math errors on your return
- Discrepancies between the income you reported and forms filed by your employer and financial institutions
- Business expenses or deductions that seem excessive for your occupation or income level
- Claiming credits you don’t qualify for
- Failing to report all your taxable income
Audits may also be randomly issued or target specific professions prone to high rates of misreporting. But in most cases, they are initiated in response to something on your return that raises a red flag.
Why Math Errors Draw Attention
One of the most basic but common triggers for an audit is making mathematical mistakes when figuring your tax liability. This could involve simple errors like:
- Forgetting to carry a number when adding up columns
- Transposing numbers (writing 501 instead of 510)
- Entering a deduction on the wrong line
- Forgetting to include a form or schedule that impacts your calculations
When your math is off, the numbers on your return don’t add up correctly. The IRS’s automated system flags these mathematical discrepancies. And while minor mistakes may only lead to a request for clarification, significant errors can result in an audit.
Tips for Avoiding Math Errors
To reduce the chances of having your return kicked out for math errors, be sure to:
- Take your time and carefully enter numbers, referring back to forms and paperwork
- Double-check your addition and subtraction
- Use the calculators and tax worksheets provided by the IRS and tax software companies
- Have someone else review your return before filing
- File electronically, as software prompts you if numbers don’t match
Discrepancies Between Your Return and Third Party Documents
The IRS receives copies of many tax-related forms and documents that you get. This includes W-2s, 1099s, mortgage interest statements, and retirement account distributions. The numbers you report must match the amounts reported on these third-party documents.
If there are major inconsistencies between your return and these other filings, you’ll trigger an IRS notice. Small differences may get overlooked. But reporting numbers dramatically different than what your employer or financial institutions file will make the IRS suspicious.
Why Inconsistencies Draw Scrutiny
There are several innocent reasons why your return may not match third-party documents, including:
- Clerical errors by your employer or bank when filing paperwork
- Forgetting about a small interest payment reported on a 1099-INT
- Misreading a figure when transcribing it from a document onto your return
However, in many cases, major discrepancies arise when filers intentionally do not report all their taxable income. The IRS understands this tendency for underreporting. So they routinely compare returns against documents filed by third parties to look for warning signs of fraud or evasion.
Strategies to Avoid Discrepancies
You can minimize the chances of accidentally mismatching your return against other reported amounts by:
- Waiting to file until you receive all tax statements
- Entering figures exactly as they appear on W-2s, 1099s, etc.
- Not relying solely on your own records, as they may differ from official forms
- Using online calculators to double-check figures if transcribing manually
- Logging into your online accounts to confirm interest amounts
Questionable Income Sources or Excessive Deductions
Claiming income from unusual sources or taking large, atypical deductions for your occupation or income bracket raises suspicions. Auditors understand standard practices for different professions and income levels. Tax returns that show highly abnormal income or excessive write-offs and credits relative to your reported income will spark an audit.
Red Flags for Unusual Income Sources
Some income sources that may seem questionable or suggest unreported income include:
- Rental income with no rental property listed on your return
- Business income reported on a Schedule C without registering a business
- Minimal income from wages or self-employment but large interest, dividend or capital gain income
The IRS keeps metrics on average household investment income. So realizing substantial interest/dividend income without documenting sufficient sources raises suspicions of hidden income sources.
Red Flags for Excessive Deductions
Claiming large tax deductions disproportionate to your occupation or income range is another audit trigger. Some questionable deductions include:
- Mortgage interest exceeding reasonable amounts for your property
- Deducting expenses for a home office or vehicle use at near 100% levels
- Writing off excessive entertainment, travel, or meal expenses for your field
- Claiming high levels of unreimbursed employee expenses unlikely for your career
Even if these technically qualify based on your records, unusually high deductions suggest you may be overreaching to evade taxes. Auditors understand norms for expense write-offs across different tax situations.
Justifying Questionable Income and Expenses
If your return includes income sources or expenses substantially outside the norm for your overall tax profile, be sure you have strong documentation to justify them. This includes records like:
- Business registration documents validating unusual income
- Rental agreements proving rental property ownership
- Canceled checks, receipts and logbooks documenting large expenses
Without evidence that clearly explains the reasons for abnormal income or write-offs, your return will be at high risk for audit.
Claiming Tax Credits You Don’t Qualify For
Another frequent audit trigger is claiming tax credits you don’t actually qualify for based on your specific situation. Some examples include:
- Claiming an education credit without attending college during the tax year
- Claiming the first-time homebuyer credit even though you’ve owned a home before
- Claiming the electric vehicle credit after selling the EV that qualified you for it
The IRS analyzes returns to identify taxpayers claiming credits for which they clearly do not meet the eligibility requirements. Doing so is not just a math mistake—it constitutes potential tax fraud.
Avoiding Questionable Credits
With the wide range of credits available, it can be confusing remembering what you qualify for each year. Strategies to avoid claiming incorrect credits include:
- Only claim credits you claimed on last year’s return if your situation has not changed
- Review the IRS’s eligibility criteria if your status has changed
- Use the IRS’s interactive tax assistant tool to determine your eligibility
- Consult a tax planner if you have complex circumstances
Claiming credits without fully understanding the requirements risks IRS scrutiny. Do your homework first or work with a preparer to ensure you only claim qualifying credits.
Failure to Report All Taxable Income
One of the biggest reasons filers get audited is failing to report their full taxable income. This includes both intentionally hiding sources of income and accidentally omitting forms of taxable income.
How Taxpayers Commonly Underreport Income
Some ways filers frequently underreport income leading to high audit potential include:
- Not reporting cash side jobs or underreporting self-employment income
- Hiding investment income in offshore accounts
- Failing to report income when selling assets like stocks or property
- Not reporting Roth IRA early withdrawals
- Forgetting to report taxable distributions from retirement accounts
In addition to purposeful omissions, many filers also simply forget to include taxable interest, dividends, rents, and other common forms of income. But whether intentional or accidental, leaving off sources of income drastically raises audit risk.
Strategies to Report Income Accurately
To avoid overlooking taxable income, be sure to:
- Report all W-2, 1099-MISC, 1099-INT/DIV, and other income statements
- Review prior year returns for types of income to watch for
- Log in to investment/retirement accounts to confirm taxable distributions
- Track rental income, self-employment earnings, and other side income
Taxpayers substantially underreporting income relative to past returns or their overall profile often face IRS inquiry.
Random Audits
In addition to auditing returns that appear suspicious, the IRS also conducts random audits. Each year a small percentage of returns are selected at random just to keep taxpayers honest.
Odds of Being Randomly Audited
Your chances of being randomly chosen for audit are extremely low, with only around 1 in 250 returns selected. The odds increase slightly to around 1 in 100 for high earners making over $10 million annually. But overall, randomly chosen audits are still quite rare.
Surviving Random Audits
Getting through a random audit simply requires cooperating fully and providing supporting documentation on:
- Income reported
- Deductions claimed
- Credits claimed
As long as you followed the tax code and maintained records, you likely have nothing to worry about. Random audits are primarily intended to keep everyone honest, not pinpoint cheaters.
Audits Targeting Specific Professions or Income Sources
The IRS also conducts specialized audits targeting returns where the taxpayer falls into a profession or income category prone to misreporting. These help enforce tax compliance across key groups.
Common Targets of Focused Audits
Some occupations and income situations commonly facing focused audits include:
- Small business owners
- Self-employed individuals
- Cash-heavy businesses like restaurants
- Returns reporting rental real estate income
- Taxpayers reporting income from illegal activities
- Partnership and S-Corporation returns
IRS data shows significant tax underpayment among these groups, prompting focused compliance efforts.
Strategies If You’re a Target
If you fall into a frequently audited category, be sure to:
- Keep detailed, organized records
- Report all your income accurately
- Avoid claiming excessive expenses or deductions
- Ensure you qualify for all credits claimed
Have a tax professional knowledgeable about your occupation review your return. With extra diligence, those in targeted groups can minimize their audit chances.
Steps to Take When You Receive an Audit Notice
If you do receive a dreaded letter from the IRS indicating they plan to audit your return, stay calm. Just follow these steps:
- Read the notice carefully to determine what they plan to examine
- Gather all relevant documentation such as receipts, canceled checks, logs, prior year returns, etc.
- Decide whether to handle yourself or use a tax pro
- Notify the IRS if you need to reschedule within the allotted time
- Never ignore an audit notice—lack of response can lead to even bigger problems
Audits are not as scary as they seem if you have your paperwork in order. Provide what the IRS asks for in an organized manner. Knowing what triggers audits also helps you file accurately from the start.
Conclusion
In summary, many actions can increase your audit risk, with common triggers including:
- Math errors
- Inconsistencies between your return and third party documents
- Questionable income sources or high deductions
- Claiming incorrect tax credits
- Failing to report all taxable income
Random and focused audits of certain professions also occur annually. But armed with knowledge of typical audit triggers and smart filing strategies, taxpayers can minimize their chances of being selected for review.
Key Audit Triggers Table
| Issue | Examples | Prevention Tips |
|---|---|---|
| Math Errors | Incorrect addition/subtraction, transposed numbers, incorrect forms attached | Double check calculations, have someone else review your return |
| Inconsistent Reporting | Different amounts than what employers/banks report to IRS | Match return figures exactly to 1099s, W-2s, etc. |
| Questionable Income/Deductions | Rental income without owning property, excessive business deductions for occupation | Have strong documentation to validate abnormal income sources or expenses |
| Incorrect Credit Claims | Claiming credits you don’t qualify for | Review eligibility requirements before claiming credits |
| Omitted Income | Not reporting all taxable income sources | Report all 1099, W-2, and other types of income |