For many taxpayers, the word “audit” evokes a sense of dread. The idea of the IRS combing through your tax return can feel overwhelming. However, most audits are the result of clear triggers that the IRS uses to identify potential discrepancies. By understanding these reasons, you can take steps to avoid unnecessary scrutiny and remain compliant.
In this post, we’ll explore the common reasons taxpayers are audited and how you can reduce your chances of being selected.
Common Reasons for IRS Audits
Math Errors and Inconsistencies
Simple mistakes on your tax return, like addition errors or mismatched information, can raise a red flag. The IRS uses automated systems to check returns for accuracy, and discrepancies—no matter how minor—might prompt further investigation.
Unreported Income
The IRS receives copies of all 1099s, W-2s, and other income documents. If you forget to report income from a side gig, freelance work, or even interest from a bank account, the IRS’s automated systems will catch the discrepancy. Failing to report all income is one of the most common audit triggers.
Excessive Deductions or Credits
If you claim deductions or credits that are unusually high relative to your income, the IRS may want to take a closer look. For example:
- Large charitable contributions
- High business expenses
- Unusually high medical deductions
These claims aren’t inherently problematic, but they need to be well-documented to pass scrutiny.
Cash-Based Businesses
If you operate a cash-intensive business, such as a restaurant, salon, or taxi service, the IRS may pay extra attention. These businesses are more prone to underreporting income, which makes them a focus of audits.
High Earners
The IRS often audits individuals earning $200,000 or more annually at higher rates than those with lower incomes. The more income you report, the greater the likelihood of your return being reviewed.
Large Transactions
Significant financial events, such as large gifts, foreign account activity, or cryptocurrency transactions, can trigger audits. These types of activities often require additional reporting, and missing or incomplete documentation may lead to scrutiny.
Related Party Transactions
Transactions between related parties—such as family members or controlled businesses—may raise questions. This is especially true if the IRS suspects that these arrangements were designed to lower taxable income.
Virtual Currency Transactions
The IRS has been on the hunt and heavily using its resources to identify non-reported income related to virtual currency and other digital asset transactions. Taxpayers with investments in this area should make sure that they report properly these transactions.
Business Expenses
Business owners often find themselves heavily scrutinized by the IRS. The government looks for returns where expenses appear to be out of the norm compared to businesses with similar revenues or in their industry. While business owners should not hesitate to take valid expenses that they are entitled to, they should just make they have these expenses properly documented.
Previous Audits
If you’ve been audited before, the IRS may keep a closer eye on your future returns, especially if the prior audit revealed significant discrepancies.
These are all reasons that taxpayers find themselves audited by the IRS. It’s important to make sure that taxpayers have the knowledge and time to file their returns accurately or in cases where they’re not able to do so, consider finding competent professionals who can help them do so. If you’re interested in finding experienced and competent firm to help you file your return accurately or navigate you through an IRS problem, give us a call at (972) 821-1991 or schedule some time on my calendar at https://jablonskytaxrelief.com/
