There are a number of reasons you might be the recipient of an audit by the IRS. No one enjoys the thought of being audited, but it does happen. I will discuss just seven reasons, but there can always be other triggers that the IRS looks for. I have read many statistics from various websites and they all seem to agree that only about 1% of those earning less than $200,000 get audited while about 4% of those earning more than $200,000 get audited and the chances increase with income. I was unsuccessful in locating this information on the IRS website. The one thing that is apparent is the more money you make, the greater the possibility of being audited.
Here are some reasons that you might be audited:
- Not Reporting All Income
The IRS receives copies from businesses and individuals of the W2s and 1099s that are issued for the year. They are required to file this information by the end of January. If you fail to report income, the IRS will notice this.
The W2s tell how much you made and how much federal, Social Security, Medicare and state as well as local taxes were withheld from those earnings. It also can contain additional information such as how much housing allowance a minister received.
Form 1099 comes in various forms. The most common being the 1099-MISC. Any of the 1099 forms will report any income that you would have received outside of being an employee.
- Breaking Rules of Foreign Accounts
The IRS receives reports from the various foreign accounts about what was paid out, etc. It is very important that you report this information on your return in the appropriate way. There is a slew of information on the IRS website that you can find regarding your specific situation. Feel free to go to their website to get the appropriate information for your situation.
- Blurring the Lines on Business Expenses
A lot of sole proprietors get looked at pretty closely by the IRS. It is easy for business owners to report expenses as being business related that the IRS does not define as being business related. A common mistake I have heard others talk about reporting their mileage from their house to the business location. That is not defined as being a business expense. If you are at the office and you need to run some errands that are related to the business, then you can keep track of those miles.
Another misconception amongst business owners is eating out. You really should be cautious as to what is considered a business meal vs a personal meal.
When filling in the Schedule C for your Form 1040, be sure to only report expenses that are truly business expenses according to the IRS. Publication 535 is a great source of what the IRS accepts as being a business expense.
- Math Errors, Typos & Entry Errors
Although a math error, typo or entry error can trigger an audit, the IRS will issue correspondence regarding the potential error. They might send the taxpayer a letter requesting the W2, Form 1099, or other proof of said error. If you supply the supporting documentation that is accurate according to your tax form, then the IRS will generally accept that and you won’t have to worry about any further action.
- Not Reporting How You Earned the Income
If you work in a service industry and receive tips, you are required to report those tips. It doesn’t matter if they are reported on your W2 or not, you should report it on your tax return at the end of the year. If your tips are not recorded on your W2, there is a line for Other Income that you need to list TIPS on so that the IRS will know where you came up with this figure.
- Sketchy Tax Preparer
If your tax preparer has a history of making errors or his/her clients are often audited, then you might consider getting your taxes prepared by another individual. It is for obvious reasons that the IRS would look at a repeat offender’s clients to see if there are errors that need to be corrected.
- Unusually High Charitable Deductions
If you report a high percentage of your income as being donated to charity, this will raise a red flag with the IRS. You still need to have a livable wage in order to survive. If you are giving more than the acceptable amount of “excess” income, then the IRS is going to be looking hard at our return.
I have only listed 7 potential triggers to getting audited. There are many more that can get the attention of the IRS. The biggest thing is to make sure you fill out your tax forms accurately and don’t try to claim things on your taxes that are in that “grey” area. If you struggle with your taxes, hire a reputable tax preparer to file your taxes. I also want to caution you that tax preparers are also human and do make mistakes. It is always a good practice to look over your return once the tax preparer has completed it to verify that the amounts are accurate. Never feel like you are pestering the preparer when you have questions about the return.