The Top 10 Tax Audit Triggers
March 8, 2013 : JoeTaxpayer - Guest Contributor
Editor’s Note: This article was updated on July 27, 2016.
Ever wonder what the top tax audit tax triggers are? As you may know, a tax audit is an IRS inspection of a person or business entity’s tax records. If you’re audited, the IRS will send you a letter stating which type of tax audit applies to you. You’ll need to comply with the IRS’ requests for information (which is why you’re advised to keep your tax returns and supporting documentation for a few years). This post lists some of the top audit triggers; items that may cause the IRS to examine certain returns more closely. Do any of these appear on your tax return?
1. High Income
In this case, it’s simply a matter of “follow the money.” Assuming any individual is as honest as the next, the IRS is likely to have a higher payoff by auditing returns of higher income people. While the overall audit rate is just over 1% of returns filed, a tax return showing over $200,000 of income has nearly a 4% chance of getting audited.
2. High Charitable Deductions
“In general, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income computed without regard to net operating loss carrybacks. Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income (computed without regard to net operating loss carrybacks), however.”
A good rule of thumb: always keep a record of your charitable deductions. Check out Publication 526 for more guidance on charitable contributions.
3. Cash-Based Businesses
A number of professions are looked at a bit more closely by the IRS, perhaps because they combine high income potential with an easy ability to accept cash. For these professions, it’s a matter of keeping good records to show you’re not hiding income.
4. Failing to Report Income
If you are a W-2 employee or are a 1099 contractor, the IRS gets notified of this income as well. When these documents arrive in the mail, there’s no excuse for misplacing them, as the IRS has this data as well. If your reported income adds up to less than what the IRS shows you earned, an audit may follow. You may not receive a 1099 if the amount earned is under $600, so your total earnings may be higher than the IRS sees. But that’s OK, you need to report it anyway.
5. Home Office Deduction
The IRS regulations require “that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business.” The current Form 8829 is a 43-line exercise of one’s math skills and patience. For many people, the lack of a separate exclusive area disqualifies their home office deduction.
6. Taking EITC Tax Credits
The Earned Income Tax Credit (EITC) is a tax credit designed to help low to moderate income families. You may be audited if you receive an EITC but make more money than the eligibility requirements. To avoid being audited for this, just take the credit if you qualify.
7. Schedule-C Losses
If you are starting a small business, you might have some losses along the way, and that’s understandable. Unfortunately, the IRS expects that you’ll be reporting a profit in three of five years. If not, the IRS may believe your business is actually a hobby you are trying to write off as a business.
8. Gambling Losses
If you have any winnings from gambling, whether it’s from betting at a horse track, hitting it big at the slots, or those scratch-off tickets at the local newsstand, Uncle Sam is your partner and that income must be reported. Just like a loss in the stock market can offset gains, if you carefully track your losses and keep your receipts, you can use those losses to offset your jackpot earnings, see Topic 419 from the IRS for more information. If you have no winnings, however, you can’t write off any losses. Claim a net gambling loss for the year, and it’s a potential audit for you.
9. Adoption Tax Credit
This credit is available when you adopt a child into your family, and it’s significant. If you adopted a child last year or plan to this year, check out Topic 607 and be sure to have all required documentation on file.
10. Missing or Frivolous Information
Signature(s), date, Social Security number(s), and filing status… These are items that, if missing, will result in the IRS sending the return back to you, and potentially resulting in an audit. There are times for levity, but there’s no place for humor on your tax return. Even if you’ve paid your tax bill in full, if the return itself doesn’t offer enough information or has writing on it that’s not needed, your return may be deemed ‘frivolous’ and can result in a steep penalty.
Unfortunately, the exact numbers that might trip an audit are a secret the IRS keeps to itself. It’s safe to say that, while there’s nothing you can do to avoid being audited, good record keeping, honest income reporting, and reliable tax software like H&R Block’s will go a long way toward keeping the audit process as painless as possible.
If you’ve received an audit notice and want advice or help from others who have been in your shoes, join us in The H&R Block Community.