If You Can’t Pass This Quiz, the IRS Is (Probably) Coming After You
It’s extremely unlikely that you will face a tax audit in any given year. However, more than 1 million Americans do get audited every year.
See: 30 Ways To Prevent a Tax Audit
Whether you’re consciously trying to take out a few extra dollars from your IRS tax refund or you legitimately didn’t know you were making errors on your return, there are certain actions that are more likely to trigger an audit.
Last updated: Feb. 4, 2021
Did You Report All of Your Income?
Most taxpayers understand that they are supposed to report all of their income to the IRS. But did you know that the IRS already has a copy of your income? When you gather all of your documentation at tax time, do you understand which figures count as taxable income that must be reported on your tax return?
Learn More: 5 Most Common IRS Tax Forms Explained
If You Answered No …
… then the IRS is definitely coming after you.
Failure to report income is a big audit trigger. When your employer sends you a W-2 at the beginning of the year, a copy is sent to the IRS as well. If you work as a freelancer or consultant and receive a 1099-MISC, the IRS receives a copy of that document as well. What some taxpayers might overlook are less-frequent payouts, such as gambling winnings or K-1 partnership income. When you file your taxes, make sure that your numbers match what the IRS sees.
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Did You Report Your Foreign Assets?
It’s a common — and even logical — thought that what you own overseas should be none of the IRS’ business. However, the United States taxes the worldwide income of its citizens, wherever it is earned. Even if you don’t earn money overseas, do you have any foreign bank accounts? Rules for reporting interest from foreign bank accounts can be complicated.
Take Advantage: 15 Commonly Missed Tax Deductions
If You Answered No …
… you could trigger an audit.
If you have one or several foreign bank accounts, you’re required to report them to the IRS on the Report of Foreign Bank and Financial Accounts if the combined balance of all foreign accounts was $10,000 or more at any time during the year.
Foreign assets are a bit of a double-edged sword, as telling the IRS you have foreign assets could draw additional scrutiny to your return. However, not informing the IRS of your foreign accounts is even more likely to result in an audit.
Did You Separate Your Business and Personal Expenses?
On your credit card statement, every dinner out looks the same. You might wonder, how can the IRS tell the difference between a business meal and a personal one? This is particularly true if you run your own business, as you probably pay for more business meals than a typical salaried employee.
But, do you really need to write down which expenses are for business and which are personal?
Check Out: Every Document You Need To Defend Yourself During an Audit
If You Answered Yes …
… then you’re doing a good job.
The IRS allows businesses to deduct 50% of legitimate dining and entertainment expenses. However, you must document the business purpose of the expense, which includes writing down who was with you and what you were discussing. If you have any single expenses greater than $75, you must keep the receipts.
Business travel, dining and entertainment expenses are often a target of IRS scrutiny, so if you’re audited, you’ll need to provide documentation or lose your deduction.
Did You Earn More Than $200,000?
It’s certainly not a crime to earn a lot of money, but making more than $200,000 puts you among the top earners in America. If you’re making this type of money, your tax return is likely more complicated than average.
You might have entries for everything from rental income to business expenses, itemized expenses and partnership income, any of which could draw IRS attention. But is simply making a lot of money enough to cause a problem?
If You Answered No …
… your chances for an audit just decreased.
While the IRS doesn’t single out high earners just because of the income they make, statistics show that the more money a tax return shows, the more likely the IRS is to generate revenue from an audit. As a result, high earners are more likely to receive that audit notice.
Did You Claim a Home Office Deduction?
Small businesses are the lifeblood of the American economy. Many of these small businesses operate out of a home.
If you’re one of these businesses, you can take advantage of the deduction for legitimate home office expenses. But did you claim a home office deduction simply because you work at home a few days a month?
If You Answered Yes …
… you might increase your chances of an audit.
You should never be afraid to take as many legitimate deductions as you are entitled to. However, even if your home office is legitimate, be aware that the IRS often takes a closer look at returns with a home office deduction.
For your deduction to be valid, you must have a space in your home dedicated exclusively to your business. You must document all of your valid expenses, from rent to utilities, and allocate them to your home office based on the percentage of floor space that your home office occupies.
Learn: 7 Ways You’re Accidentally Committing Tax Fraud
Did You Run Your Own Business?
No taxpayers should be penalized for running their own businesses. In fact, many tax deductions are created just to support small businesses.
Business deductions reduce your taxable income on a dollar-for-dollar basis, so a large amount of deductions can dramatically reduce your tax liability. Did you include self-employed income when you filed your tax return?
If You Answered Yes …
… you increased your chances of an audit.
Sole proprietors must report income and expenses on Schedule C, which is chock-full of potential deductions. The IRS recognizes that some self-employed taxpayers make liberal use of these deductions. If you do run a business, you’re entitled to claim as many legal deductions as you can.
However, no matter how honest your tax return is, the mere presence of a Schedule C is likely to get your return a second look from the IRS.
Did You Keep Written Records of Your Vehicle Expenses?
For many taxpayers, vehicle expenses never make it to their tax returns. However, if you use your vehicle for business purposes, you have a legitimate claim to a deduction.
Costs such as gas, oil, repairs and depreciation could all lower your taxable income. When you claim these expenses, do you keep written copies?
If You Answered No …
… you are not helping to prevent a tax audit.
The IRS requires written documentation of the business use of a vehicle, particularly if your vehicle is the one you also use for personal travel. If you claim these expenses, the IRS will be more likely to investigate, but if you claim legitimate deductions — and keep written records — you can avoid any problems.
Did Your Business Lose Money the Last 3 Years?
Starting your own business is often a tough proposition. Many businesses lose money their first year, and some lose money year after year. The thought that losing money could trigger an audit seems like adding insult to injury.
So, is it true that losing money for three years or more could cause you a problem at tax time?
If You Answered Yes …
… you might have to explain yourself to the IRS.
While losing money is not illegal, the IRS considers businesses that lose money in three of the previous five years to be hobbies. Dubbed the “hobby loss rule,” the IRS might disallow your deductions if your business doesn’t show any attempt to generate a profit. Certain business, such as horse breeding, are allowed to lose money for five out of seven years.
Did You Work as a Freelancer or Consultant?
With the rise of the so-called “gig economy,” more taxpayers than ever are choosing to work as freelancers or consultants.
Your choice of job in and of itself is not enough to warrant an IRS audit. Yet, some types of tax returns are more frequently audited than others. Can the tax returns of freelancers and contractors be audit bait?
If You Answered Yes …
… you might get audited.
Independent contractors, such as freelancers, receive Form 1099-MISC from their clients, rather than a Form W-2 from an employer. Information on Form 1099-MISC must be transferred to Schedule C, as with any self-employed business owner. Statistically, these returns are more likely to be audited.
Did You Enter Round Numbers on Your Tax Return?
Round numbers can make your return easy to read and easy to calculate. For certain purposes, rounding is extremely helpful. If you enter round numbers when you make a budget or do simple calculations at home, do you carry that practice over to your federal tax return?
If You Answered Yes …
… you might be likely to hear from the IRS. However, this one is a bit tricky.
The IRS does allow for certain instances of rounding on a tax return — say, from $72.98 to $73, or from $72.12 to $72. However, if you’re rounding in larger amounts, such as from $72 to $100, you can expect to get some questions. Round numbers like $100.00 don’t often occur in the world of income and deductions, and if your tax return is littered with them, it can suggest either sloppy record keeping or an attempt to hide something. In either case, further investigation is warranted.
Up Next: What Are Your Chances of Being Audited by the IRS?
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