Surprising Ways Your Seemingly Innocent Tax Return Might Trigger an IRS Audit
Filing your taxes ranks right up there with going to the dentist or getting selected for jury duty. Hardly anyone, minus a select few, would say they enjoy spending nights and weekends compiling their tax return. The IRS employs a computer system — not a human — to analyze millions of tax returns and scan them for anomalies that could trigger an audit.
Because it’s the computer that decides whether your return passes inspection, it’s all the more important to file correctly. Unfortunately, innocent mistakes on your tax return are more common than you think, and they make it even more likely your file sparks additional scrutiny from a human agent.
Knowing how to avoid a costly IRS audit can help put your mind at ease. Here are nine seemingly innocent red flags that could trigger a tax audit.
1. You’re self-employed
The IRS pays close attention to those who own their own businesses. Properly claiming deductions for a home office and other business expenses can get a bit murky — especially if you claim these things but don’t earn a lot of money in return.
Cash businesses like salons, restaurants, taxi services, or car washes are on the IRS’ radar as well. These businesses are less likely to be issued 1099s for their services, but rather cash payments for each transaction that’s harder to track. If you reported a lower income that doesn’t quite sustain your lifestyle, the IRS may assume you are conveniently “forgetting” about all your income at tax time.
Next: These people are most likely to get audited
2. You made a lot of money last year
People making more than $200,000 annually are more likely to have their tax return audited than people who make less. That number climbs even higher for millionaires. 2016 data showed 5.83% of people with income over $1 million were audited by the IRS while income earners in the $75,000 and $99,000 bracket were audited the least.
It’s clear the IRS focuses on the wealthy, as that’s where the money is. So, people with high incomes may want to triple check their return before sending it to Uncle Sam for review.
Next: The dangers of reporting business expenses
3. You deducted meals and travel expenses
Seemingly standard business expense deductions on your tax return could also trigger an IRS audit. When they see countless expensive deductions for meals, entertainment, or travel, the agency likes to double check these claims are on the up-and-up.
Uncle Sam doesn’t take too kindly to funding large write-offs that seem too extravagant for business purposes. If you commonly deduct these types of expenditures, keep receipts as documentation.
Next: Be careful about giving to charity
4. You gave money to charity
It’s the few bad apples who inflate their charitable donations to increase their write-off potential that ruin it for the rest of us. That means your generosity can become an audit red flag for the IRS — especially when your deductions are disproportionate to your income and what you can afford.
For example, the IRS will give a $3,000 charity deduction a second look if your income falls below the $50,000 range. So, continue being generous, but be careful about how much you claim on your tax return each year.
Next: A common issue for freelancers
5. You overlooked income
It’s easy for people with multiple 1099s and W-2 forms to overlook or forget to file one. But your employers send copies of all those same forms to the IRS when they send them to you.
When freelancers and independent contractors make a mistake while reporting total income, it’s likely the IRS already knows about it. They’ll flag it for review, and you’ll be dinged for failing to report all income over $600 you received for services.
Next: A costly retirement error
6. You dipped into your retirement fund
A casual reach into your retirement fund before your true retirement age is another innocent action the IRS will scrutinize. No, it’s not illegal to make an early withdrawal, but the agency found a whopping 40% of people who took early withdrawals in 2015 also committed reporting errors on their tax return. Most don’t consider the 10% tax penalty that comes with early withdrawal at or before age 59½. This simple filing mistake often leads to an audit.
Next: Why you must be careful when claiming vehicle deductions
7. You claimed business use on a vehicle
The IRS is constantly hunting for tax returns that claim 100% business use of their automobile. For one, most owners use their vehicles for both personal and professional use. Also, many filers file incorrectly when they chose either the actual expenses method or the standard mileage rate method for deduction, which results in a red flag.
Heavy SUVs and large trucks are commonly on the chopping block at the agency because they depreciate faster. The IRS is attuned to these shenanigans and encourage taxpayers to keep solid records of reported expenses to ensure they stay above board.
Next: Did you make a big purchase this year?
8. You spent a lot of money
The IRS gets a little suspicious whenever they see that you’ve engaged in large cash transactions, particularly when your income doesn’t support it. If a young adult throws down $10,000 to buy a new car or a real estate agent fails to report a large payment after selling a house to the agency, the IRS will wonder where the untraceable money came from. This will undoubtedly spur additional review and you’ll be forced to explain yourself in detail to avoid penalty.
Next: The problem with foreign accounts
9. You have money overseas
Money stashed outside the U.S. is of supreme interest to the IRS. They have additional reporting requirements for money in foreign accounts to help negate those who establish these accounts for tax avoidance purposes. Any offshore accounts with a combined total of $10,000 or more must be reported, or the IRS will slap you with severe penalties.
Next: See what you can do if you get audited and want to fight it.
Can you dispute an IRS audit?
Yes, taxpayers can dispute an auditor’s findings — thousands do it each year. You can choose to file an informal appeal with your auditor directly or begin the process of stating your case to the IRS tax court.
Of course, appealing the audit will cost you considerable time and a few thousand dollars in legal fees, but it could be worth the expense if you feel the monetary discrepancy is large enough. Follow these IRS guidelines if you feel your audit results are incorrect and wish to appeal.
Follow Lauren on Twitter @la_hamer.
Check out The Cheat Sheet on Facebook!