12 IRS Audit Triggers

Nov 16, 2023 By Triston Martin

The results of studies have proven that filing taxes and, in turn, the risk of the possibility of an IRS audit could increase the blood pressure of some people. However, you should be encouraged as the IRS doesn't conduct tax audits all the time. The IRS has been auditing fewer tax returns since 2010, due in part to budget cuts in the federal government that have impacted the size of staff. The IRS only reviewed 0.63 percent of all personal tax returns and received a thorough examination in 2018 (the most recent figures available) compared to 1.11 percent in the year 2010. But, taxpaying taxpayers often make a few errors that can increase the chances that agents are likely to take another look at their tax returns.

Make a Lot of Money

Half of the return audited was for taxpayers who earn more than a million dollars annually. If you earn less than one million annually, this reduces your chances of being audited by half.

Unreported Income

The IRS has copies of 1099s and W-2s and 1099s, and their systems examine this information against the amount you declare when you file your taxes. Like 1099s that aren't listed on your tax return, any discrepancy may cause further scrutiny. If you're receiving 1099 that's not from you or doesn't match, don't just ignore it. Contact the company that issued the 1099 and request that they submit a corrected form to the IRS.

Run a Cash-Heavy Business

If your business usually deals with large amounts of cash, it is more likely to be subject to audits. The IRS has discovered that cash-based business owners tend to "forget" to declare some cash income that could otherwise be reported. More aggressively targeting these businesses, restaurants, convenience stores, laundromats, car washes, laundromats, hair salons, and car washes are most likely to be scrutinized.

File a Return with Math Errors

Subtraction or addition errors could be detected, and flag your tax returns to an audit even if the error is to the benefit or against the IRS. Tax software will do all calculations and has the added advantage of preventing your return from this particular warning sign.

Excessive Deductions

The IRS will evaluate your deductions with the average total deductions for an item that other taxpayers have claimed and are in the same band. If a taxpayer's deductions appear to be higher than these averages could be further examined by the IRS. Do not hesitate to claim any deduction you're eligible to, but ensure that you have the appropriate documents.

Schedule C Filers

The IRS is particularly vigilant about companies that operate solely on cash and those that report an income loss. They've got plenty of experience in auditing self-employed taxpayers who do not report the income they earn or who overstate their expenses. Be sure that your documents support the information you're declaring.

Claiming a Loss on a Hobby

Making expenses exempt for a business is okay; however, you shouldn't present the hobby you enjoy as a commercial enterprise. To qualify as a legitimate business, you need to be able to generate profits. In general, the IRS requires that you report the profit you earn for 3 out of every five years that you manage the business. If you can report your hobby as a business, it has to be managed as a business accompanied by appropriate documents and records. If it is not, the IRS might ask you to re-state any loss or income from your business as loss of income from your hobby as per the rules for a hobby. For more details, refer to IRS's rules regarding hobbies.

Earned Income Tax Credit (EITC)

It is estimated that the IRS believes that millions of dollars in EITC claimants are paid out in errors. Some mistakes are not intentional; however, the IRS examines EITC claims with a keen eye to stop fraud. If you're claiming an Earned Income Tax Credit, be sure that you document your compliance with EITC regulations to submit this information to the IRS in the future.

Dealing in Cryptocurrency and Other Virtual Currency

There's less oversight by the government for cryptocurrencies like Bitcoin and Ethereum than regular currencies, which can open up fraud possibilities. The IRS has developed a compliance campaign that focuses solely on transactions using cryptocurrency and has also stepped up enforcement to tackle the issue of abuse of virtual currency.

Use Your Car for Business

This is another area where individuals take advantage of this is why the IRS is inclined to scrutinize this area. Other than the cost of traveling to work, small-scale business owners can take business-related car expenses off their tax returns. When it comes to entertainment and travel, ensure you keep accurate documentation, including the log of mileage and entries on your calendar, which includes the purpose of your business since taking this deduction, could increase the chance of being subject to audits.

Round Numbers

Did you shell out $150 on this and $75 on this? If you're able to keep small amounts, it's a typical error on the tax side of the business that can lead the IRS to believe you're making up some of the numbers. At the very least, you're keeping poor books.

A Company That Is Losing Money

It's not ideal if your business suffers losses. If the IRS finds someone with a full-time job and has a loss for greater than three years from the past five years, they'll be forced to examine the situation more closely.

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