5 Reasons the IRS May Audit You

woman sitting while undergoing irs audit

Few things conjure as much dread as the prospect of an IRS audit. Though your chances of being audited are small—less than one-third of 1%—anything you can do to put the odds in your favor is welcome. The most important measures you can take to audit-proof your taxes are to follow IRS guidelines to the letter, be honest and document everything. Beyond that, consider these common IRS audit triggers to avoid.

5 Reasons the IRS May Audit You

1. Underreporting Your Income

Failing to report all of your income on your tax return is a top audit trigger. That's because income that goes unreported on your tax return also goes untaxed.

The IRS receives copies of your W-2 and 1099 forms and will automatically check to see that your reported income matches up. Common errors that can trip you up:

  • Not accounting for all W-2 income, which may be more likely if you had more than one job this year.
  • Leaving off 1099 income, including side money you made doing gig work.
  • Excluding interest or earnings from savings or investment accounts.
  • Forgetting to report capital gains on stock trades, cryptocurrency trades or property sales.

2. Questionable Business Deductions or Losses

Reporting business profit and loss on Schedule C complicates your tax return. Though you must file Schedule C if you have business income—and you should take the deductions you're entitled to—be mindful of the rules. The IRS uses data from other tax returns to create occupational norms, so if your travel expenses are twice what other people in your industry typically claim, you may be subject to further scrutiny. Also double-check:

  • Home office or vehicle deductions that blur the lines between personal and business use. An unrealistic claim—for example, deducting 100% of the expenses on your personal vehicle as a business expense—will likely raise suspicion.
  • Multiple losses: If you've taken a loss on your business for multiple years in a row, the IRS may want to make sure your business is legitimate.
  • Unreported income, including cash or payment app transactions.
  • Business deductions that are unusual for your occupation.

3. Undocumented Filing Status, Deduction or Credits

The federal government offers tax breaks, credits and deductions that may reduce your tax bill, including this year's expanded Child Tax Credit (CTC), the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC) to help cover educational expenses. Filing as head of household instead of single may also offer tax advantages, including a larger standard deduction. For the 2021 tax year, you may be able to deduct a charity donation worth up to 100% of your adjusted gross income.

But these benefits require you to meet specific qualifications and, often, to have supporting documentation to prove that you qualify. A few common pitfalls:

  • Not meeting the requirements: It should go without saying that you can't claim the CTC if you don't have a child. You can't file as head of household if you don't have a qualifying dependent.
  • Failing to document: To claim the AOTC, for example, you'll need to provide your child's name and Social Security number and keep a record of qualifying expenses like tuition and books.
  • Being conspicuous: Claiming an unusually large charity deduction may invite scrutiny, especially if you've donated, say, 40% of your taxable income or more. That doesn't mean you shouldn't claim deductions you're entitled to; just be prepared to back up your claim with receipts, bank records and information that shows the charity is qualified.

4. Math Errors

IRS automated processes catch millions of math errors on tax returns, including more than 12 million mistakes that triggered error notifications in 2020. Working with a tax professional or using tax preparation software may reduce your chances of making a math error. In addition to simply doing your calculations wrong, common math errors include:

  • Entering the wrong data from your W-2 or other form.
  • Using the wrong formula to calculate your taxes.

A math error doesn't necessarily trigger a full-blown audit: The IRS may simply notify you of your mistake and propose a resolution. However, if an automated process finds a math error that sends your return for manual review, that review may reveal other issues, which may lead to an audit.

5. Not Reporting Foreign Accounts

In accordance with the Foreign Account Tax Compliance Act, the IRS requires you to report foreign bank accounts with assets of $50,000 or more on Form 8938. Not reporting foreign accounts may set your tax return up for additional review, but reporting foreign accounts may also be a red flag, signaling you have the potential to hide assets abroad.

What Are the Chances of Being Audited?

Americans filed just over 157 million individual tax returns in fiscal 2020. In the same year, the IRS completed 509,917 audits, making your overall odds of being audited roughly 0.3% or 3 in 1,000.

IRS audits are conducted by mail and in person. Correspondence audits, conducted through mail, are limited in scope. Typically, they cover only one year and involve issues that may be easily resolved by providing documents or other data.

In addition to formal audits, the IRS reviews every tax return using automated processes to check for math errors and other discrepancies. In the 2020 fiscal year, the IRS closed more than 942,000 automated cases of underreported income and nearly 663,000 cases where the agency filed substitute tax returns for taxpayers who did not file themselves. As already noted, 12 million math error notices were issued. The upshot: While errors and omissions on your tax return are likely to be caught, formal audits are relatively uncommon.

Who Is Most Likely to Be Audited by the IRS?

According to the Transactional Records Access Clearinghouse (TRAC) at Syracuse University, fewer than 2 in 100 taxpayers reporting $1 million or more in income were audited in the 2020 fiscal year. At an audit rate of nearly 2%, millionaires are at a higher risk for audit than the overall average of 0.3%. Still, TRAC reports that the number of millionaires who were audited fell 72% between 2012 and 2020—even as the number of millionaires nearly doubled.

Meanwhile, taxpayers who claim the Earned Income Tax Credit (EITC) are among the most likely to be audited. The EITC is an anti-poverty provision that offers tax credits to low-income taxpayers. People who claim the EITC are often audited to ensure that they qualify for the credit—and as an anti-fraud measure. As a result, a U.S. Treasury Department report found EITC audits accounted for nearly 31% of all audits over the past 10 years. Numerically speaking, EITC audits accounted for 157,803 out of 509,917 reviews in fiscal 2020.

A Few Final Safeguards

Bear in mind that the simpler your tax return, the less information there is for the IRS to question. Claiming the standard deduction instead of itemizing, for instance, eliminates a whole category of potential disputes. Then again, deductions and tax credits exist for your benefit. If you qualify, don't hesitate to take advantage of these tools.

In the unlikely event you are audited, make sure you have the documents to support your case. If the audit ultimately finds you submitted an inaccurate tax return, you may be charged a 20% accuracy-related penalty on top of any additional money you owe. That penalty can climb if the IRS determines you made gross misstatements or committed fraud. Criminal charges may also result, but are uncommon.

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