The IRS (Internal Revenue Service) may choose to audit a tax return for various reasons, and there isn’t always a single trigger that leads to an audit. However, certain factors or red flags may increase the likelihood of an IRS audit.
Here are some common reasons why the IRS may decide to audit a tax return…
- Discrepancies or Errors – Discrepancies or errors on a tax return, such as mathematical mistakes, missing information, or inconsistencies between reported income and reported expenses, may prompt the IRS to conduct an audit.
- High Income – Tax returns with high income levels, particularly significantly higher than the national average for similar taxpayers, may attract IRS scrutiny.
- Unreported Income – Failure to report all sources of income, such as earnings from self-employment, rental income, investment income, or foreign income, could trigger an audit.
- Large Deductions or Losses – Claiming unusually large deductions, losses, or credits compared to your income level or industry norms may raise red flags for the IRS. This includes deductions for business expenses, home office deductions, charitable contributions, and medical expenses.
- Home Office Deductions – Claiming deductions for a home office can be a trigger for an audit, as the IRS closely scrutinizes these deductions to ensure they meet the strict requirements for business use and exclusivity.
- Business Expenses – Excessive or unsubstantiated business expenses, especially for travel, meals, entertainment, vehicle use, and other discretionary expenses, may lead to an audit.
- Self-Employment Tax – Individuals who are self-employed or independent contractors and report business income on Schedule C are more likely to be audited because of the potential for underreporting income or overstating deductions.
- Random Selection – The IRS may select tax returns for audit through random sampling or computerized selection processes, even if there are no apparent red flags.
- Prior Audit History – Individuals or businesses with a history of past audits or compliance issues may be subject to additional scrutiny from the IRS in subsequent years.
- Related Party Transactions – Transactions involving related parties, such as family members, business partners, or entities with common ownership, may be subject to closer examination to ensure they are conducted at arm’s length and comply with tax laws.
- Inconsistent Information – Inconsistencies between information reported on your tax return and information reported by third parties, such as employers, financial institutions, or business partners, may trigger an audit.
It’s essential to accurately report your income and expenses, maintain proper documentation, and comply with tax laws to reduce the risk of an IRS audit. If you’re selected for an audit, it’s crucial to cooperate with the IRS and provide requested documentation and information to support the items on your tax return. If you’re unsure about specific tax reporting requirements or potential audit triggers, consider consulting with a tax professional or accountant for guidance.