While the IRS conducts audits to ensure tax compliance, certain actions can increase your chances of being selected for an audit. Understanding these common audit triggers can help you avoid mistakes and reduce the likelihood of an IRS audit.
Reporting unusually high deductions
One of the most common reasons for an IRS audit is reporting deductions that seem out of line with your income. For example, if you report large charitable donations, business expenses, or medical deductions relative to your income, the IRS might flag your return. Ensure your deductions are reasonable and well-documented to avoid raising any red flags.
Failing to report all income
The IRS receives copies of all the forms that report your income, such as W-2s and 1099s. If your reported income doesn’t match what the IRS has on file, it can trigger an audit. Always double-check your income forms to ensure you’re reporting everything accurately.
Claiming business losses
Claiming business losses year after year, especially for a business that’s not showing a clear path to profitability, can draw the IRS’s attention and trigger an audit. If you run a business and report consistent losses, the IRS may wonder if you’re truly operating a business or just using it to offset other income. Make sure your business is legitimate and properly documented.
Large cash transactions
If you have a history of large, unexplained cash transactions, the IRS may consider this suspicious. Large cash deposits or withdrawals that aren’t reported properly can lead to an audit. Keep detailed records of any cash transactions and be prepared to explain them if questioned.
Underreporting of income
Underreporting income, whether intentional or not, is a common trigger for IRS audits. This includes not reporting side income, freelance work, or investment earnings. The IRS uses data matching to identify discrepancies, so it’s important to report all income you receive.
Random selection
Finally, keep in mind that not all audits are triggered by red flags. The IRS also selects returns at random for audits, so it’s important to ensure your tax return is accurate and compliant regardless of whether you think you’re at risk.
By avoiding these common triggers and being diligent about your tax filings, you can reduce your chances of facing an audit. However, if you’re unsure about your tax return, it’s always a good idea to consult with a tax professional to ensure everything is in order.
