Top IRS audit triggers: 8 tax mistakes to avoid
Worried about making a mistake on your taxes? We understand the stress it can cause. While we can help you navigate every step of your return, you may want to know what could trigger an audit, IRS notice, or other IRS correspondence. That doesn’t necessarily mean you’ve done something wrong, just that the return you filed has something that the IRS will want to look into deeper.
But if you did everything correctly on your return, you should be able to prove that you are paying all taxes owed. If this is the case, the IRS will then agree with you and leave your return the same, and the audit will be over without any fines or any worries about tax evasion. Phew!
If the IRS does see a significant error, they may conduct an audit, which can happen either by mail or in person, with three possible outcomes:
- The IRS decides all is well and the return stays the same.
- The IRS proposes one or more changes and you agree to it and/or pay more taxes, interest, or a penalty.
- The IRS proposes a change, and while you understand their proposal, you don’t agree. In the latter case, you can appeal or enter into a mediation with the IRS.
Rest at ease knowing there are ways to avoid audits altogether. We’ve listed the top audit triggers and reasons the IRS will send you correspondence, how to know if you’re in the wrong, and what proof you’ll need to ward off a full-blown audit, penalties, and frankly, unnecessary frustration:
1. Reporting the wrong taxable income
You can’t lie on your federal income taxes, because both you and the IRS received your W-2 and 1099 forms, for both full-time employees and self-employed individuals.
Acceptable: Reporting all income received.
Not OK: Estimating or fudging how much you’ve made, even if you’re a freelancer.
The proof you need: Compare the W-2 or 1099 you receive against your own records. If you think it is wrong, inform the sender and ask them to file a corrected W-2 or 1099 with the IRS. Report all taxable income you receive, even if you don’t receive a 1099 or other document.
2. Huge donations with a small income
The IRS may flag your return if you’re giving away large charitable donations when you don’t have much income.
Acceptable: You gave a generous donation to a meaningful charity of your choice … and then suddenly lost your job, making your income lower than expected.
Not OK: Fibbing charitable deductions or even giving to charity and not getting proper documentation for your charitable donations.
The proof you need: Get your large noncash donation worth $5,000 or more appraised, file Form 8283 for any donation over $500, and make sure you keep all related receipts and documentation to support your charitable donation.
3. Pricey dinners with clients
If you’re an independent contractor, you can take many deductions if the expenses are ordinary and necessary to your line of work. For example, this may include meal expenses for potential or existing clients. Yet, some people in this scenario fudge the truth – and the IRS catches on. Rules for claiming this are strict, so it’s a smart idea to understand them before attempting to exploit the system.
Acceptable: Deducting 100% (through 2022) of the cost of a reasonably priced meal at a restaurant where you entertained potential or current clients while discussing business. In 2023, the deduction is limited to 50%.
Not OK: Deducting multiple lavish steak dinners with rare champagne – with the company of your friends or family (not business related), and then trying to deduct it as expenses.
The proof you need: Keep all receipts, and record the dates and times, description of the expense, the business purpose, and relationship to those you hosted (paid for).
4. Personal use of a business vehicle
Let’s say you have a side business. You may use your car for some parts of your business. But if you’re also using it for personal matters, account for it on your taxes.
Acceptable: The car is used solely for delivering good or offering services to your clients. For example, if you’re a florist, you use your business van to deliver flowers to customers.
Not OK: You use your business vehicle to run errands, get your nails done, or pick your kid up from soccer practice and write it off.
The proof you need: Keep a detailed record of your mileage, and calendar entries specifying your starting and ending addresses, and business purpose for every time you use the car for business.
5. Your home office
A big lifestyle change since the pandemic is that many more people are working from home. But working at home doesn’t necessarily mean you’ll be able to take a home office deduction. That’s generally only available for independent contractors. Even then, a lot of people think they can stretch the definition of a home office, which is why claiming it could trigger an audit.
Acceptable: Claiming an area where you keep your computer, printer, work phone, bookshelves, and other critical work supplies resides; and where you do the majority of your work and that is not used for any other purpose, especially personal use.
Also, there are special home office deduction rules that pertain to certain groups, including Armed Forces reservists or fee-based state or local government officials.
Not OK: Deducting expenses as a regular employee (and you’re not one of the four roles above).
The proof you need: If you’re filing taxes as an independent contractor, you should file your taxes on a Schedule C (Form 1040) to properly report your income and claim expenses. Whether you work with a tax pro or use our online program, count on us to help navigate self-employed taxes.
6. Math errors
It seems obvious, but we can’t leave it off the list because it’s one of the top reasons for audits.
Math errors: Simple tax mistakes like small mathematical and clerical errors, such as transposing digits or typos, inconsistent entries, or missing taxpayer identification numbers. When a math error happens, the IRS will often propose corrections to your return and send you a letter telling you how they propose to fix these and often proposing to assess additional tax, penalties and interest.
Not OK: Claiming the wrong deductions and credits, filing under the wrong status and stating the wrong income.
The proof you need: Double and triple check your work before filing and, again, keep meticulous records and proof for deductions and credits to avoid being required to file an amended tax return or letting this error affect your IRS refund. Other tips to avoid errors include filing electronically and double checking amounts you enter on the return.
7. Estimating expenses
Did you really spend $50 on this and $200 on that? If every year you have tidy little numbers, this is a common fudge that lends the IRS to believe that you’re making some things up or not keeping great records.
Acceptable: You round to the nearest dollar.
Not OK: You round up to the nearest $25.
The proof you need: Properly document deductions and credits. Then, use the actual numbers on your forms so they match your receipts and other records.
8. Mistaking a hobby as a business
To clarify, the answer will depend on how you’re engaged in this activity. You will need to define this activity as one of the following:
- As a hobby
- As a for-profit activity
The IRS usually considers your hobby a business if you’ve made a profit for three of the past five years. Otherwise, you have to establish a profit motive. You will determine your profit motive based on factors like:
- If you carry on the activity like a business
- Your expertise
- Time and effort you spend on the activity
- Your success in carrying on other similar or dissimilar activities
- Your history of income or losses for the activity
- Occasional profits, if any, that you earn
- Your overall financial status
- If the activity has elements of personal recreation
Acceptable: You engage in a hobby activity – like flower arranging – without a profit motive, and properly report any hobby income on your tax return.
Not OK: You have an expensive, full-time occupation like owning a flower shop and you make a profit, but don’t report the income properly on your tax return.
The proof you need: Keep all documentation to prove the nature of your work as well as your income and expenses – and if you made a profit for three out of five years. A separate bank account, credit card, etc. used only for the activity help could support the fact that you’re running a business, not a hobby.
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