Don’t fear the tax man. Nearly a quarter of Americans are worried about the possibility of an IRS audit, a 2017 Rasmussen Poll found. That’s the highest level in 10 years. But most are losing sleep over something that will never happen. Only a tiny fraction will actually have to endure a face-to-face sit-down with an IRS examiner.
Of more than 146 million individual taxpayers in the United States, fewer than 1%, or about 1.2 million, had their 2015 tax returns audited, according to the IRS. (Budget cuts have reduced the number of audits considerably.) Who are the unlucky audit victims? Although anyone can be the subject of an audit, certain red flags on your return raise the risk considerably.
“There are no specific deductions that raise a taxpayer’s chances of being audited, but there are actions that raise a red flag and should be avoided,” Dave Du Val, the chief customer advocacy officer for TaxAudit.com, told The Cheat Sheet. “For example, the IRS is always on the lookout for both unreported income and high expenses.”
Accidentally duplicating employee and business expenses or having losses on hobby businesses are other red flags, he said. Avoiding sloppiness when preparing your taxes can reduce the chances the IRS will ask questions about your return.
“Always be careful and accurate when preparing your taxes. And remember that actual receipts and records must be kept to prove eligibility for every deduction or credit,” Du Val said.
What specific red flags does the IRS look for on tax returns? If any of these 15 situations apply to you, an audit could be in your future.
1. You’re rich
Middle-income taxpayers are rarely audited, according to IRS data. Of all tax returns filed in 2014, the IRS did not examine over 99% of those with incomes between $25,000 and $200,000. Once your income crosses the $200,000 mark, your audit risk steadily climbs. About 1.5% of taxpayers who made between $200,000 and $500,000 were audited, along with 8.42% of those earning between $1 million and $5 million. Among the lucky few who earned more than $10 million a year, the IRS audited 35%.
But that doesn’t meaning being poor is a solution either …
2. You’re very poor (or look it)
The IRS tends to take a closer look at high-income taxpayers, but a return that shows very low or no income also raises red flags. When the IRS sees little or no income on a return, it might think you’re hiding some of what you earned. In 2015, 3.78% of returns showing no adjusted gross income were audited, along with 1% of those with income less than $25,000.
You might be too generous …
3. Your charitable contributions seem really high
“The IRS loves to pounce on people who report high itemized deductions, especially for charitable contributions,” Du Val said. It’s not that the government doesn’t want you to deduct your legitimate charitable donations. But if the amount you claim is very high compared to what others at your income level give, it looks like you’re trying to skirt taxes by exaggerating your generosity. For example, the average charitable deduction people who earn between $75,000 and $100,000 claimed is $3,356. If you deduct three or four times that amount, the IRS might demand some proof of your good deeds.
4. Your work-related deductions are excessive
Excessive deductions for employee expenses that weren’t reimbursed are also likely to catch the eye of the IRS, according to Du Val. Certain work-related expenses might be deductible, such as the costs of traveling between two separate workplaces or business meals you paid for yourself. But some people pad their deductions by claiming things they really shouldn’t as work expenses, such as dry cleaning.
“It’s fine to claim these legally allowable deductions for your actual qualifying expenses, but make sure you have your documentation on hand before you file your tax return,” he said.
5. Your rental property expenses are suspicious
Owning a rental property can be a great way to earn extra income, but for novice landlords, it can also be a tax trap. Confused property owners might claim deductions incorrectly, subjecting themselves to an audit.
“Tax returns with what appear to be inflated rental expenses are frequently caught in the IRS net,” Du Val said. “Some of the deductions on the Schedule E, where the income and expenses for rentals are reported, can be easily misinterpreted. Those who prepare their own tax returns should take the time to understand the deductions they are claiming.”
6. Your expenses and income don’t line up
The IRS sees millions of tax returns every year, so it has a pretty good idea of what’s normal for someone with a particular income or in a certain line of work. If you earn $50,000 a year and claim to have $35,000 in employee expenses that weren’t reimbursed, the IRS will wonder what’s up, Du Val said. Claiming expenses that aren’t typical in your field — such as big mileage deductions if your work doesn’t typically require travel — is another red flag.
How many kids do you have again …
7. You’ve claimed someone else’s dependent as your own
“Who gets the kids?” isn’t just a question for divorce lawyers. The IRS also wants to know. Only one parent can claim a child on a tax return. “When two people claim the same dependent, the IRS gets involved,” Du Val said. In a case where a dependent is claimed twice, you might have to prove you’re the one eligible for the deduction.
“Although separated and divorced parents who have custody have the clear advantage, they still have to prove everything by providing birth certificates, school records, and more,” Du Val said. “Those who file using the Head of Household filing status are often questioned, as well.”
Being your own boss isn’t always that great …
8. You’re self-employed
Self-employed taxpayers who file a Schedule C are more likely to be audited than those who work for a traditional employer. Between 2% and 2.5% of individual tax returns with business income of more than $25,000 were audited in 2014, according to the IRS. The higher audit risk is understandable because it’s easier for you to “forget” to declare income or to take improper deductions to avoid tax. If you do work for yourself, keep meticulous records of income and expenses, just in case the IRS does come calling.
9. You’ve claimed business credits you’re not entitled to
Falsely claiming business tax credits is one of the “dirty dozen” tax scams the IRS specifically tells taxpayers to avoid. Specifically at issue are the fuel tax credit and research credit. The fuel tax credit is typically only available if you bought fuel for off-highway business use (such as running a tractor on a farm). People who claim the research credit might fail to prove they were actually involved in qualified research activities.
10. You’ve lied about your income
Lying about your income is one of the easiest ways to cheat on your taxes. It’s also one of the easiest ways to get caught. The IRS matches up the income you report on your return with the W-2 and 1099 forms it receives from your employer, broker, or anyone else who paid you money in the previous year. If the numbers don’t match up, expect an IRS follow-up.
Did you move off American soil? Not so fast …
11. You’re an expat
Many Americans living abroad find filing taxes a nightmare, not the least because of the sometimes confusing array of forms they’re required to file. Those forms also come with a higher audit risk, noted Greenback Expat Tax Services. Overall, 4.3% of international returns were audited in 2014. If you live abroad or have foreign assets or income, your best bet is likely to work with a tax professional who is experienced in those issues and can help you avoid missteps that could trigger an audit.
12. You had to file an estate tax return
Most Americans will never pay estate taxes, which only apply to estates worth more than $5.45 million. But if your rich relative passed away recently, the tax return for their estate might come under extra scrutiny. Close to 8% of estate tax returns were audited in 2014. The richer your dead relative, the more likely an audit. The IRS audited 16% of returns for estates worth $5 million to $10 million and 32% of those worth over $10 million.
13. You made a careless math error
Your teachers told you to always double check your work. You should have listened. Stupid math mistakes will catch the IRS’ attention, and taxpayers made nearly 2.2 million of them in 2015. Fortunately, an audit isn’t inevitable because you added incorrectly. You’ll probably just get a notice, saying you made a mistake and you owe more money or are entitled to a larger refund. But an error could expose your return to extra scrutiny.
14. You make a lot of cash transactions
Cash is the IRS’ nightmare. It’s hard to keep track of and easy to hide. That means it’s difficult to know whether someone who deals with a lot of cash is paying all their taxes. If you run a cash business or have a job where you get a lot of income in cash (such as a server or cab driver), you might be at risk for an audit, warned Brotman Law. The IRS also receives information about large cash transactions and suspicious activity from banks, which it might use to determine whom to audit.
15. You made a frivolous tax argument
People who hate taxes make some convoluted arguments in order to get out of paying the IRS. Some claim filing a return is voluntary, while others say paying taxes is a form of slavery, among other goofy logic. The IRS is on to these tax protesters’ tricks, though, and it isn’t amused. If the IRS realizes you’re making a frivolous tax argument, expect an audit. Hefty fines and even possible jail time could be in your future, as well.