Stay Off the IRS Radar
An IRS audit is something no taxpayer wants to experience. While less than 1% of tax returns are audited, certain red flags can increase your chances of getting selected.
By understanding what triggers an IRS audit and how to file accurately, you can reduce the risk of unwanted scrutiny. This guide will explain common IRS audit red flags, how to avoid mistakes, and what to do if you’re audited.
1. How Likely Are You to Get Audited?
📌 The IRS uses a system called the Discriminant Function System (DIF) to flag tax returns for review.
✅ Audit Rates by Income (Recent IRS Data):
| Income Bracket | Audit Rate |
|---|---|
| Under $75,000 | Less than 0.4% |
| $75,000 – $200,000 | 0.5% |
| $200,000 – $1 Million | 1.1% |
| Over $1 Million | 2.4% – 6% |
📌 Who’s Most at Risk?
- High-income earners ($200K+)
- Self-employed individuals
- Large business owners
- Those with excessive deductions
💡 Tip: The best way to avoid an audit is to file accurately and report all income correctly.
2. IRS Red Flags That Increase Audit Risk
📌 Certain tax return patterns increase the chance of IRS scrutiny. Watch out for these audit triggers:
🚨 1. Failing to Report All Income
✔ The IRS receives copies of W-2s, 1099s, and other income forms.
✔ If you omit income, the IRS will notice and send a CP2000 Notice (matching error).
📌 Example:
- You work a full-time job (W-2) and do freelance work (1099-NEC).
- You forget to report $5,000 in freelance income.
- The IRS automatically flags the mismatch.
💡 Tip: Check your IRS account transcript to ensure all reported income matches before filing.
🚨 2. Large or Excessive Deductions
✔ If your deductions are much higher than others in your income bracket, the IRS may take a closer look.
✔ High deductions must be reasonable and well-documented.
📌 Example of Red Flags:
- Reporting $50,000 in business expenses while earning only $60,000.
- Claiming 100% of your car as a business expense.
- Writing off extravagant travel or meals that aren’t business-related.
💡 Tip: Keep detailed receipts and records for all deductions in case of an audit.
🚨 3. Claiming the Home Office Deduction Incorrectly
✔ The IRS closely scrutinizes home office deductions for abuse.
✔ To qualify, your office must be:
- Used exclusively for business (not a dining room or bedroom).
- Your primary place of business (not just occasional use).
📌 Red Flag: Claiming an entire house or apartment as a home office.
💡 Tip: Use the simplified home office deduction ($5 per square foot, up to 300 sq. ft.) for less IRS scrutiny.
🚨 4. Large Charitable Donations Compared to Income
✔ The IRS flags charitable deductions that seem excessive for your income level.
✔ If you donate more than 60% of your adjusted gross income (AGI), expect scrutiny.
📌 Example:
- You earn $50,000 and claim $30,000 in charitable donations.
- The IRS will likely request documentation to verify your donations.
💡 Tip: Always get written receipts from charities for large donations.
🚨 5. High Earners & Self-Employed Filers
✔ The IRS audits self-employed individuals more often because of potential underreported income & inflated expenses.
✔ Cash businesses (restaurants, salons, taxis) are especially high-risk for audits.
📌 Example:
- A freelancer reports $150,000 in business income but claims $140,000 in expenses.
- The IRS may flag this return as suspicious and request proof of expenses.
💡 Tip: Keep detailed invoices, receipts, and accounting records if self-employed.
🚨 6. Rounding Numbers or Estimating Expenses
✔ The IRS looks for rounded numbers (e.g., $5,000 in travel, $10,000 in supplies).
✔ Expenses should reflect actual numbers, not estimates.
📌 Example:
- Reporting $8,000 for travel and $5,000 for meals exactly is a red flag.
- If real expenses were $7,896 and $4,732, reporting actual numbers looks more legitimate.
💡 Tip: Always use exact amounts from receipts when reporting deductions.
🚨 7. Claiming a Child Tax Credit or EITC When Ineligible
✔ The IRS aggressively audits Earned Income Tax Credit (EITC) claims due to fraud.
✔ Ensure you legally qualify for dependent and childcare credits.
📌 Common Mistakes:
❌ Claiming a child that doesn’t live with you.
❌ Listing a non-relative as a dependent.
❌ Filing as Head of Household when married.
💡 Tip: If audited for dependents, the IRS may ask for school records, birth certificates, or custody documents.
3. How to Reduce Your Audit Risk
📌 Follow these best practices to file accurately and avoid IRS scrutiny:
✅ 1. Report ALL Income Accurately
✔ Double-check W-2s, 1099s, and income statements.
✔ Use the IRS Online Transcript Tool to verify reported income.
✅ 2. Keep Detailed Records for Deductions
✔ Save receipts, invoices, and bank statements for at least 3 years.
✔ Use accounting software (QuickBooks, FreshBooks) to track expenses.
✅ 3. Use a Professional Tax Preparer
✔ If self-employed or a high earner, work with a CPA or Enrolled Agent.
✔ Tax pros help ensure compliance and reduce audit risks.
✅ 4. Be Careful with Self-Employment Expenses
✔ Don’t mix personal and business expenses.
✔ Avoid writing off 100% of meals, travel, or vehicle costs unless truly business-related.
✅ 5. Avoid Filing Late or Making Math Errors
✔ Use tax software to avoid math mistakes (a common audit trigger).
✔ Filing early reduces errors and fraud risk.
💡 Tip: The IRS rarely audits taxpayers who file simple, accurate returns with moderate deductions.
4. What to Do If You’re Audited
🚨 If the IRS audits you, don’t panic—follow these steps:
✅ 1. Respond to IRS Notices Promptly
✔ Audits start with an IRS letter requesting documentation.
✔ Ignoring it can lead to additional penalties or collections.
✅ 2. Gather Supporting Documents
✔ Provide receipts, invoices, and proof of income/deductions.
✔ If missing documents, request duplicates from banks or vendors.
✅ 3. Consult a Tax Professional
✔ A CPA or tax attorney can help navigate an audit.
✔ If you disagree with the IRS, you can file an appeal.
📌 Common IRS Audit Outcome:
✔ If your tax return is accurate, the audit is closed with no changes.
✔ If errors are found, you may owe additional taxes, penalties, or interest.
💡 Tip: Most audits are correspondence audits, meaning you won’t meet an auditor in person.
File Smart & Stay Audit-Free
📌 To avoid an IRS audit:
✔ Report all income accurately.
✔ Keep detailed records of deductions.
✔ Use exact amounts, not rounded estimates.
✔ If self-employed, separate business & personal expenses.
📌 Need expert tax help? Contact First Union Tax to ensure accurate filing and reduce audit risks!
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