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Do Certain Tax Returns Run a Greater Risk of Being Audited?
In 2022, the IRS audited 626,204 income tax returns — 0.38% of filings. That number could increase in 2023 now that, under the Inflation Reduction Act, the IRS has received $80 billion in new funding.
It makes one wonder what triggers an audit and whether certain tax returns run a greater risk of being audited.
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The answer to that question is, mostly, yes: Certain tax returns do run a greater risk of being audited. However, before we get into those details, we must also throw in a rather contradictory disclaimer. The IRS does use a random audit process, which is exactly what it sounds like.
“In these cases the computers at the IRS randomly choose returns for audit so that the information obtained can be used to establish statistical norms,” said Steven J. Weil, Ph.D., president and tax manager of RMS Accounting.
Random audits aside, there are a number of ways to trigger the IRS into potentially flagging your tax return for audit.
Also see tax deductions you can take without itemizing.
You Made a Lot of Money
Did you make a ton of money in 2022? North of $200,000? You may be at more risk for an audit than those who made less.
“Taxpayers who make over $200,000 annually are more likely to be audited,” said Cordearo Dadson, the founder of Pocket Cows and the co-president of the Private Directors Association of South Florida.
Recent data from the IRS shows that, in the last seven months in 2019, audit rates for those making above $100,00 doubled.
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You Have a Complex Tax Return
A complex tax return also might raise brows at the IRS. But what exactly constitutes a complex return?
“Complex returns include those with multiple income sources, high amounts of business expenses, multiple investments or various tax credits or deductions,” Dadson said. “In these cases, the IRS may want to double-check that everything is reported accurately and all deductions are legitimate.”
You Claimed a Lot of Deductions
Claiming a lot of deductions is one of the top reasons a tax return may be flagged for an audit.
“When you take too many deductions, it can raise a red flag to the IRS,” Dadson said. “It is important to remember that the IRS looks at returns more closely when it appears that there are more deductions than usual. You should be prepared to provide evidence that supports each deduction you claim.”
You Have a History of Being Audited
Flagged for an audit in the past? Chances are good you’ll be flagged again, so you should be prepared.
“If you’re unlucky enough to be in this situation, you should take extra care with your paperwork and documentation,” Dadson said. “You may want to consider consulting a qualified tax professional to make sure everything is in order and to help prepare you for the audit. The IRS is likely to pay extra attention if they’ve audited you in the past, so make sure you’re prepared.”
You’re Self-Employed
The millions of Americans who are self-employed are more likely to be audited than those who are employed solely by another.
“That’s because the IRS can find discrepancies between the money you report and what’s reported by other sources,” Dadson said. “For example, if you claim income from a 1099, that money must match the amount on the form that your payer sends to the IRS. If it doesn’t, that’s a red flag that could trigger an audit.
“Additionally, if you take large deductions such as home office, auto expenses or medical costs, you may be at higher risk for an audit. It’s important to keep good records of all your business expenses and income so you can back up any deductions you claim.”
You Didn’t File or Pay Your Taxes on Time
Late or behind on a tax payment? You’re already in hot water with the IRS and prone to be audited.
“If you failed to file or pay your taxes on time, the IRS may flag your return for an audit,” Dadson said. “This is especially true if you haven’t filed or paid for several years, as the government wants to ensure that it collects the money owed to it.
“Additionally, any late payments you make may also be scrutinized by the IRS. If you are a habitual late filer, it might be beneficial to work with a tax professional who can help you get your paperwork in order and meet deadlines.”
You Have Unreported Income
It’s crucial that you report all of your income. Not reporting income is a major red flag and an easy way for the IRS to “catch” you and flag your return for an audit.
“This is especially true if the unreported income is large,” Dadson said. “The IRS takes non-reporting of income seriously and can assess penalties and interest in addition to conducting an audit.”
You Claimed Hobby Losses
Some people confuse a hobby with a business, but the difference needs to be crystal clear when filing your taxes; because, if you write off your fishing gear as a work expense when you’re a lawyer, things could get real bad real fast.
“The IRS wants to make sure that you’re not claiming deductions for activities you engage in for personal reasons rather than for profit,” Dadson said. “To avoid getting flagged for an audit, make sure to understand the difference between a hobby and a business, and be clear about how you’re using the profits or losses from your activities.”
You Have Large Charitable Donations
Charity is wonderful — but it can go a little too far in the opinion of Uncle Sam — unless you back it up with detailed receipts (if you’re going to claim qualifying donations on your tax return).
“Any donation over $250 needs to be accompanied by a receipt that includes the name of the charity, the amount donated and the date of the donation,” Dadson said. “Donations that are larger than this may require additional documentation, so it’s important to keep track of what was given and when. If the IRS notices that your charitable donations are unusually high in comparison to your income level, they may consider it a red flag and choose to audit your return.”
You Took the Home Office Deduction
The home office deduction lets taxpayers write off expenses related to their home workspace, which is an extra big perk these days, with so many people being self-employed and/or working remote.
“However, you can only take the home office deduction if you use the space exclusively and regularly for business,” Dadson said. “If you are using the room for both personal and business activities, then you can’t take the deduction. Additionally, if you use more than one room for your home office, each room must be used exclusively for business purposes in order for you to take the deduction. It is important to make sure that you have the correct documentation in place and that your home office expenses are allocated correctly on your tax return.”
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