The IRS (Internal Revenue Service) may choose to audit a taxpayer’s return for various reasons, and there is no definitive list of triggers as the selection process is somewhat opaque.
However, there are certain factors that may increase the likelihood of an IRS audit…
Discrepancies or Errors – Discrepancies or errors on a tax return, such as math errors, missing information, or inconsistencies between reported income and information reported by third parties (like employers or financial institutions), could raise red flags and prompt an audit.
High Income – Tax returns with high income levels may receive increased scrutiny. High-income taxpayers are more likely to be audited because there’s a greater potential for substantial tax liabilities.
Unusual Deductions or Losses – Claiming deductions or losses that are unusually high or disproportionate to the taxpayer’s income level or industry norms could trigger an audit. Deductions that are not supported by adequate documentation or that appear excessive compared to similar taxpayers may attract attention.
Self-Employment – Self-employed individuals and small business owners are often subject to closer scrutiny because of the potential for underreporting income or overstating deductions.
Failure to Report Income – Failing to report income, such as income from investments, rental properties, or freelance work, increases the likelihood of an audit. The IRS receives information about income from various sources, and discrepancies between reported and reported income can lead to audits.
Inconsistent Information – Inconsistencies between different parts of the tax return or between the taxpayer’s return and information reported by third parties, such as Forms W-2 or 1099, can trigger an audit.
Large Charitable Contributions – Claiming large charitable contributions relative to income without adequate documentation can raise suspicions and result in an audit. Taxpayers must maintain proper records, such as receipts or acknowledgments from charities, to substantiate charitable deductions.
Foreign Bank Accounts or Assets – Taxpayers with foreign financial accounts or assets are subject to additional reporting requirements. Failure to disclose foreign accounts or report foreign income accurately can lead to audits and significant penalties.
Previous Audit History – Taxpayers who have been audited in the past or who have a history of noncompliance with tax laws may be subject to increased scrutiny in future tax years.
Random Selection – In addition to targeted audits based on specific criteria, the IRS may also conduct random audits as part of its enforcement efforts to ensure compliance with tax laws.
Being audited does not necessarily indicate wrongdoing on the taxpayer’s part. Sometimes audits are conducted simply to verify information or clarify discrepancies. However, taxpayers should take care to accurately report income, deductions, and other tax-related information to minimize the risk of an audit and ensure compliance with tax laws.