They might be two of the most dreaded words in the English language: IRS audit. Even though the chances of having your tax return audited by the IRS are relatively slim — in recent years, fewer than 1% of individual tax returns have been audited — it’s still smart to know what things might trigger an audit.
With tax season in full force, here are a few of the most common IRS audit triggers to watch out for as you work on your tax return.
1. Errors and typos — The IRS has computer programs that check all of the calculations on tax returns and match names with Social Security numbers. Any mistakes might kick the return out for closer inspection by an agent.
Ironically, this is one of the leading causes of an IRS audit — and also one of the easiest to avoid. Before filing your return, go back and double (or triple) check all of your numbers (especially your Social Security number) and your math. If you use a tax prep software program, it will probably perform all of the calculations for you.
2. Unreported taxable income — If you’re thinking about not reporting taxable income from a side job or part-time gig, think again. The IRS computers will cross-check information from Forms 1099 and W-2 with the income you report on your tax return. If there’s a discrepancy, such as income from a 1099 form that you didn’t report, this could trigger an audit.
Note: You should report all income you receive from part-time or contract jobs, even if you don’t receive a 1099 form from the payor.
3. Claiming higher-than-average tax deductions, credits and losses — The IRS computers will compare the deductions, credits and losses you claim to the average amounts claimed by other taxpayers in your income range. If your totals exceed these averages, the IRS might want to take a closer look at your return and maybe ask you some questions. Don’t hesitate to claim any deductions, credits or losses you’re entitled to, but make sure you have proper documentation to substantiate the claims.
4. Claiming a large deduction for charitable donations — These can be especially noteworthy to the IRS, which is looking for charitable donation deductions that are disproportionally large based on the taxpayer’s gross income. Again, you should claim legitimate charitable donation deductions you’re entitled to — just be sure to obtain written substantiation from the qualified charity to which you donate cash or property.
Note: If you make a noncash donation of more than $500, you must file IRS Form 8283 along with your income tax return.
5. Claiming the home office deduction — You may be able to claim this deduction if you use a portion of your home in the operation of a business, including a freelance or side business. If you do, be sure your home office meets the IRS definition of “regular and exclusive” business use. For example, doing work on a laptop while sitting at your dining room table likely wouldn’t qualify your dining room as a home office since you probably eat meals there, too.
6. Claiming the Earned Income Tax Credit (EITC) — The IRS scrutinizes claims for this tax credit closely because it believes billions of dollars of EITC claims are paid out in error each year, some of them due to fraud. If you claim this credit, make sure you meet the criteria and be prepared to show documentation in case the IRS wants to see this in an audit.
7. Claiming 100 percent vehicle business use — The IRS knows this is extremely rare so it’s likely to raise suspicion. This is especially true for 100 percent claims for heavy SUVs and large trucks bought late in the year, since these vehicles are eligible for more favorable depreciation write-offs. Keep detailed mileage logs and calendar entries for the purpose of all business trips taken in the vehicle.
8. Dealing in cryptocurrency — There’s less government regulation now over cryptocurrency than there is over regular currency, which means more opportunity for fraud. This is a particular area of focus for the IRS right now, which has created a compliance campaign focused on cryptocurrency transactions. You must disclose on Form 1040 whether you have bought, sold or exchanged any financial interest in cryptocurrency.
The IRS has created a webpage with practical information that can help you prepare for an audit — click here to learn more. And be sure to consult with a tax expert for more detailed guidance in your specific situation.