Many Americans are afraid of getting audited or receiving any sort of feedback from the IRS other than a refund or confirmation notice.
According to the IRS, though, an audit is simply a review of your accounts "to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct."
The average individual's chances of being audited are pretty slim: Of the roughly 165 million returns the IRS received last year, approximately 626,204,or less than 0.4%, were audited.
A review of a federal tax return can be triggered at random, but certain behaviors are more likely to be flagged than others.
This story is part of Taxes 2023, CNET's coverage of the best tax software, tax tips and everything else you need to file your return and track your refund.
Here are common mistakes that generate more scrutiny from the IRS and what you can do to avoid them.
For more tax tips, find out all the homeowner credits for 2023and see if you qualify for the IRS' free filing program.
1. Your return is incomplete
"There's no one single thing that automatically triggers an audit but mismatched documentation is the most common reason why you'll get a letter from the IRS," Jo Willetts, director of tax resources at Jackson Hewitt, told CNET.
It can be as simple as a missing form, Willetts said, "and often it happens to people who rush around at the last minute."
The federal government offers a variety of credits to offset inflation and the pandemic, like the child tax credit, which allows parents to claim up to $2,000 per qualifying child.
But you have to show you legitimately qualify for these benefits, Willetts told CNET.
"If, last year, you claimed no child tax credit and this year you claimed three kids and they're not babies, it's going to trigger a letter from the IRS," she said.
That doesn't always mean you've made a mistake or are trying to fool the government, of course. You might have had a child in May 2022, and the IRS is working off your 2021 return.
2. You messed up the math or other information
While simple math errors don't usually trigger a full-blown examination by the IRS, they will garner extra scrutiny and slow down the completion of your return.
So can entering your Social Security number wrong, transposing the numbers on your address and other bonehead blunders.
Filing electronically cuts down on these foul-ups by pulling a lot of information from previous returns and letting you load your W-2s or 1099s directly into the system.
Using a professional tax preparer is also a good bulwark against mistakes and miscalculations.
3. You're self-employed and don't report deductions accurately
"If you work for yourself and have legitimate business expenses, you should feel empowered to take them," said TurboTax tax expertLisa Greene-Lewis. "Just make sure you have receipts and documentation to back it up."
If you claim the home-office deduction, it has to be a space used "exclusively and regularly for your trade or business" -- not the dining-room table.
If you claim transportation expenses, you'll need to document the mileage used for work. If you deduct 100% of your personal vehicle as a business expense, it's going to raise a flag, Greene-Lewis said.
Being diligent is especially true when deducting business meals. In the past, they were only 50% deductible -- now you can now claim 100% of the cost of a dinner
"But you have to document who you are with, what the purpose of the meeting was, the date of the meal, and so on," Greene-Lewis said. "And of course, keep your receipts."
4. You claim too many business expenses or losses
You're required to file a Schedule C form if you have income from a business. But it complicates your return and can make you more likely to be contacted by the IRS.
Greene-Lewis encourages taxpayers to claim every deduction they're legitimately entitled to but to be extremely diligent in justifying those deductions, with details and supporting paperwork.
By and large, the IRS algorithm is looking for deductions that are outside the norm for people in your profession: If you're a patent attorney but your travel expenses are three times what other patent attorneys claim, it could lead to closer inspection.
And If you've taken a loss on your business for several years in a row, the IRS might want to make sure your business is above board.
According to Thomas Scott, a tax partner at CPA firm Aprio, small business owners who keep sloppy records often make frivolous deductions.
"When the business owner makes up expenses and deductions, they tend to stick out," Scott told CNET. "Under an audit, the IRS will require support and proof of deductions and if not provided these deductions will be disallowed."
On a similar note, Scott added, "businesses that try to take incentives and credits that they don't qualify for may cause a red flag."
5. Your charitable deductions are outsized
If you itemize your deductions, you can claim cash donations to recognized charities -- as well as the value of a donated car, clothes and other property. But the IRS notices if these donations seem out of line with your income.
The agency's computer program, the Discriminant Information Function system, continuously scans returns for such anomalies.
"If you claimed a charitable deduction that's, like, half your income, it's going to catch their eye," Greene-Lewis told CNET.
The IRS puts caps on how much of your adjusted gross income can be deducted as charitable contributions. There are some forms of donations that can exceed this limit but doing so is likely to draw scrutiny, so you better have all your paperwork in order.
6. You have undeclared income
This is the biggie: Employers are required to file a W-2 with the IRS that reflects your earnings, or 1099s in the case of freelancers and contractors who earn more than $600.
IRS automatically checks to see that your reported income matches up to what your boss submitted. It also gets notified of interest or earnings from savings accounts, investments and stock trades, too -- as well as large gambling wins, inheritances and almost any other kind of income.
And if you fail to report capital gains on cryptocurrency trades, it could trigger an audit.
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Even if you work in a cash business -- say, as a waiter or babysitter -- unclaimed income can catch up with you.
"If someone is bringing their child to you to care for, they're probably claiming your service on their taxes. So you need to make sure it all aligns," says Willetts. "Even a small business like a house painter will require you to be bonded. That will eventually cross the IRS's desk."
And government agencies talk to each other, she added. If you declare $20,000 in income on your tax return but, when you apply for a home loan backed by the Federal Housing Administration, you put down $80,000, it will raise a flag.
According to Aprio's Thomas Scott, small-business owners who don't keep good records also tend to underreport, a major audit risk.
"Because the business owner hasn't kept up with their income for the entire year, when it's time to file their taxes they tend to estimate," Scott says. "The problem with this approach shows up because most of the income earned has been reported to the IRS on a Form 1099. The IRS can match the income reported on the owner's return to the income reported on Form 1099s."
The IRS accepts tips from concerned citizens, so a disgruntled employee or aggrieved co-worker may be only too happy to report you for tax fraud, especially since the agency's 2006 Whistleblower Program increased incentives to potentially between 15% and 30% of the proceeds that the IRS collects.
The article delves into various aspects related to tax audits and potential triggers for increased scrutiny by the IRS. Let's break down the concepts and tax-related areas covered:
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Tax Audits:
- An audit is a review by the IRS to ensure tax information is reported accurately according to laws and to verify the correct amount of tax is paid.
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Likelihood of Being Audited:
- The probability of an individual being audited is relatively low, with less than 0.4% of returns audited among the 165 million received by the IRS in a year.
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Triggers for IRS Scrutiny:
- Incomplete Returns: Mismatched or missing documentation can lead to scrutiny.
- Errors in Math or Information: Simple mistakes can attract extra attention and delay processing.
- Self-Employment & Deductions: Reporting business expenses accurately and with proper documentation is crucial.
- Claiming Too Many Business Expenses or Losses: Diligence is necessary while justifying deductions to avoid suspicion.
- Charitable Deductions: Large deductions relative to income might raise flags.
- Undeclared Income: Any unreported income, whether from regular employment or other sources, can lead to audits.
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Documentation and Record-Keeping:
- Maintaining receipts, records, and proper documentation is essential to support claims made on tax returns.
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IRS Monitoring and Systems:
- The IRS employs algorithms and systems like the Discriminant Information Function to flag unusual deductions or income-to-donation ratios.
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Importance of Accurate Reporting:
- Accurate reporting of income, including earnings from various sources, is critical to avoid audits.
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Role of Professionals:
- Utilizing professional tax preparers can help mitigate errors and ensure compliance with tax laws.
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Whistleblower Program:
- The IRS accepts tips and reports from concerned individuals, including employees or associates, incentivizing them through the Whistleblower Program.
Understanding these elements can empower individuals to navigate tax filings more effectively, reduce errors, and mitigate the risk of triggering IRS scrutiny or audits.
