Here are the top 10 reasons the IRS may audit a taxpayer:
1. High Income
High-income earners are more likely to be audited. The IRS focuses on wealthier individuals because underreporting or errors in tax filings can result in larger amounts of unpaid taxes. Historically, taxpayers earning more than $400,000 face significantly higher audit rates compared to lower-income brackets.
2. Unreported Income
The IRS uses automated systems to match income reported on your return with information return documents like W-2s and 1099s submitted by employers. Failing to report all sources of income, whether from a side gig, freelance work, investments, or cryptocurrency transactions, is a major audit trigger.
3. Excessive Deductions or Credits
Claiming deductions or credits that seem unusually large compared to your reported income may raise red flags. This includes excessive charitable donations, large medical expenses, or significant business deductions for self-employed individuals.
4. Claiming Refundable Credits
Refundable tax credits, such as the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), etc. can increase your audit risk. These credits result in a direct refund from the IRS, and errors or fraudulent claims in this area are closely scrutinized.
5. Self-Employment or Cash-Based Businesses
Self-employed individuals and those in cash-intensive industries (e.g., restaurants, taxis, salons) face a higher risk of audit. This is because cash transactions are harder to track, and there’s a greater opportunity to underreport income or inflate deductions like travel, meals, and home office expenses.
6. Large, Unusual, or Questionable Items
Frequent or large business losses, especially when deducted against other income, can raise IRS suspicion. The IRS may audit to determine if the business is a legitimate for-profit activity or a hobby that shouldn’t be eligible for deductions.
7. Foreign Accounts and Income
Failing to report income from foreign accounts or investments or neglecting to file forms, such as the Foreign Bank Account Report (FBAR, can trigger an audit. The IRS has been increasingly focusing on foreign income compliance.
8. Home Office Deductions
Claiming a home office deduction can be tricky. The IRS often flags returns that include this deduction to verify that the home office is used exclusively and regularly for business purposes. Overstating expenses or improperly claiming this deduction can prompt an audit.
9. High Charitable Donations
Claiming charitable contributions that appear disproportionately large compared to your income can attract IRS attention. If your donations exceed certain thresholds, you’ll need to provide thorough documentation to support your claims.
10. Discrepancies Between Years
Large or unusual changes in income, deductions, or credits from one year to the next can raise suspicion. For example, if your reported income drastically decreases while deductions or expenses increase significantly, the IRS may audit your return to determine the cause of the discrepancy.
Maintaining accurate and thorough records, ensuring compliance with tax rules, and being cautious with deductions or credits can help reduce the chances of being audited.
