When it comes to taxes, nobody wants to hear the word “audit.” While the chances of being audited by the IRS are relatively low for most taxpayers, certain red flags can increase the likelihood of scrutiny. To help you steer clear of unwanted attention, here are the top 10 IRS audit triggers to be aware of:
1. Reporting High Income
While earning a high income is great, it can also draw the attention of the IRS. Taxpayers with incomes exceeding $1 million are statistically more likely to face an audit than those in lower brackets. If you’re in this category, make sure your filings are accurate and well-documented.
2. Failing to Report All Income
The IRS receives copies of your W-2s, 1099s, and other income-related forms. Failing to report all of your income—even small amounts—is a way to trigger an audit. Double-check that your return matches the IRS records.
3. Excessive Deductions for Business Expenses
While legitimate business expenses are deductible, excessive claims or deductions that seem disproportionate to your income can raise eyebrows. Be especially careful with travel, meals, entertainment, and home office expenses, as these are common areas of abuse.
4. Claiming a Home Office Deduction
The home office deduction is notorious for attracting IRS attention. To qualify, the space must be used exclusively and regularly for business purposes. Failing to meet these criteria or inflating your claims could result in an audit.
5. Claiming Large Charitable Donations
Charitable contributions are tax-deductible, but claiming unusually large donations compared to your income can lead to scrutiny. Always keep receipts and, for donations over $250, ensure you have written acknowledgment from the charity.
6. Failing to File or Filing Late
If you consistently fail to file your taxes or file them late, you’re more likely to be audited. Late filing can also result in penalties, so it’s always better to file on time, even if you can’t pay your full tax bill immediately.
7. Taking the Earned Income Tax Credit (EITC)
The EITC is a valuable credit for low- to moderate-income taxpayers, but it’s also frequently claimed in error. The IRS closely scrutinizes EITC claims, so ensure you meet all qualifications and provide accurate information.
8. Unusually High Medical Deductions
Medical expenses are deductible only if they exceed a certain percentage of your adjusted gross income (AGI). If you claim an unusually high amount, the IRS may want to verify the validity of those expenses. Keep detailed records and receipts.
9. Engaging in Cryptocurrency Transactions
Cryptocurrency is a growing area of focus for the IRS. If you buy, sell, or trade digital currencies, you’re required to report these transactions. Failing to do so or underreporting your crypto income can trigger an audit.
10. Round Numbers
Filing a return with suspiciously round numbers (e.g., claiming $5,000 exactly for travel expenses) can lead to additional scrutiny. Use exact amounts to avoid unnecessary attention.
How to Reduce Your Audit Risk
While you can’t guarantee you’ll avoid an audit, you can minimize the risk by:
- Filing accurate and complete tax returns.
- Keeping detailed records of all income, deductions, and credits.
- Consulting a tax professional if you’re unsure about anything.
Remember, an IRS audit doesn’t necessarily mean you’ve done something wrong. It’s often just a way for the IRS to ensure compliance. By understanding these common audit triggers and preparing your taxes carefully, you can reduce your chances of being flagged.