5 Items on Tax Returns that Commonly Trigger an IRS Audit

5 Items on Tax Returns that Commonly Trigger an IRS Audit

• Nov 01, 2021

Nobody likes to receive a notice that they’re going to be audited by the IRS. Often, one of the first questions that comes to mind when you get that notice in the mail is, “Why me? Why was I selected for an audit?” While there can be many different reasons that the IRS would decide to audit your tax return, there are 5 common items that can trigger that audit. Keep reading to learn what they are.

Underreported Income

Every tax income form you receive is also delivered to the IRS, so they already have a pretty good idea of how much you’re making during the year. Even if you’re receiving some income that isn’t reported on an official tax form, there are often other ways that the IRS can track these sources of income. For example, let’s say you performed contract work for a business, but made less than $600 from them during the year. Under that amount, the business owner doesn’t have to issue a 1099 to you. This means the income isn’t recorded on an official tax form; however, it will likely still be listed as a business expense for that company, so the record of those payments still exists.

If your reported income on your tax return doesn’t match what the IRS has on their records for you, your odds of being audited will increase significantly. It’s important to accurately report all of your income when filing your return.

High Deductions in Relation to Income

Deductions are a key way to reduce your taxable income, and you should absolutely claim any deductions that you qualify for on your return. However, claiming substantial deductions in relation to your income can be a red flag to the IRS and will increase your odds of being audited. For example, if you reported that you made $80,000, but had $40,000 in charitable donations, the IRS is going to take a closer look at your return.

This is also true of businesses. If your business is deducting a high amount in expenses (including travel, lodging, entertainment, etc.) as compared to your business’s income, your return is more likely to be audited. It’s extremely important to keep detailed records of your travel expenses and receipts if the IRS decides to audit your business.

Simple Mathematical Errors

Sometimes, your return may be selected for an audit simply because you made a mathematical error when filling out the forms. These errors are much more likely to occur when you file your return yourself, so working with a CPA can help you to avoid this problem. Something as simple as putting a decimal point in the wrong place or “rounding off” numbers on your return can lead to an IRS audit.

Recurring Business Losses

With the economy still struggling to recover from the COVID-19 pandemic, it’s not all that unusual for businesses to report a loss—perhaps even for both 2020 and 2021. However, if you’re reporting unusually high losses or recurring losses beyond the last two years, you’re much more likely to have your business’s tax return audited by the IRS. While it may not be unusual for a business to be in the red every now and then, if your business is constantly reporting losses, they’re going to wonder how you’re still operational, and will take a closer look at your income and expenses.

Commonly Abused Deductions

Again, you should never hesitate to claim a deduction that you genuinely qualify for. However, there are certain types of deductions that are frequently abused on tax returns. If you’re claiming these deductions, first of all, ensure that you genuinely qualify for them; and secondly, be prepared for the IRS to flag your return for an audit:

• Home office deduction – This one is very frequently misused by business owners. Many tax filers assume that if they use their office for official business, then they qualify for the home office deduction, but this is not true. To correctly claim this deduction, the office space must be used exclusively for business purposes, and also must be the primary location where you conduct business. Surprisingly few people who claim this deduction actually meet those two requirements, which is why it’s one of the biggest red flags for an IRS audit.
• Business mileage deduction – If you drive a vehicle for business purposes (attending meetings, going to conferences, pounding the pavement for marketing reasons, etc.), then you can deduct a certain amount on your return for every mile driven. However, this deduction does require detailed records regarding dates, starting and ending mileage for each trip, total miles driven, and so on. More so, if you’re claiming a vehicle for exclusive business use, you’ll need to make sure that all those records are up to snuff—it’s a tough deduction to support, and very commonly audited.
• Meals, travel, and entertainment deduction – You might have noticed a pattern here; this is another business-related deduction that’s commonly abused. If you spend money on expenses like team-building activities, taking clients to dinner, and so on, they’re deductible under this category. However, the nature of this deduction is very subjective; make sure you can prove a clear connection between the expense and its impact on your business, so you can support the deduction to the IRS if you’re audited.

Ultimately, an audit can often result in you owing more on your taxes than you anticipated. If this happens to you, contact IRS Advocates today. We specialize in helping clients settle tax debts with the IRS, and can help you to find a tax payment plan that works for you.