Common Mistakes That Risk a Tax Audit

Common mistakes that increase the risk of an IRS audit include unreported income, math errors, and excessively large deductions. Misreporting business expenses, omitting foreign income, and incorrect claims for dependents or tax credits like the EITC also draw scrutiny.

Filing income tax returns can be stressful. The last thing taxpayers want to do is prolong the whole process by risking an Internal Revenue Service (IRS) audit. As such, we generally try to steer clear of red flags that might trigger one. In this article, we'll review some of the common mistakes that risk an IRS audit and ways you can avoid them.

If this gets complicated or you have questions regarding your specific situation, consider speaking with an experienced tax attorney who can help you stay within the bounds of the law.

What Is an IRS Tax Audit?

A federal income tax audit is when the IRS reviews your tax returns and financial information to ensure accuracy and compliance with tax laws. In an audit, the IRS will likely check your income, tax deductions, and credits to see if you paid the right amount of taxes. It might ask for more information or documents to verify your claims. It may also do this before deciding whether to pursue an audit.

The IRS conducts four main types of audits:

  • Correspondence audits: Conducted by mail
  • Office audits: Take place in-person at an IRS office
  • Field audits: Involve an IRS visit to your home, business, or accountant's office to examine records
  • Taxpayer Compliance Measurement Program (TCMP) audits: Used to update the IRS' data on taxpayer compliance

Correspondence audits and office audits are the most common types of federal tax audits for individuals.

Audit Selection

There are several reasons the IRS may decide to audit your tax return. The IRS computer screening process uses algorithms to detect inconsistencies and unusual patterns in tax filings. These can give rise to an audit.

You can also be selected at random or because your return somehow involves other taxpayers under audit.

Mistakes that May Present an Audit Risk

There's no guaranteed way to ensure you won't be audited. But there are several avoidable errors that can trigger an IRS audit. Let's explore some of the more common ones and learn how to steer clear of them.

Unreported Income

One of the most common mistakes taxpayers make is not reporting all of their taxable income. Inaccurate reporting or underreporting of income on your tax return tends to heighten IRS scrutiny and increase your audit risk.

The IRS receives copies of your W-2 forms from employers and 1099 forms from other sources of income. It uses sophisticated data-matching technology to compare the income reported by employers, financial institutions, and other third parties with the details on your tax return.

For example, you may work a side job for a company that reports your wages as a business expense on its return. Discrepancies between this information and your reported income can trigger an audit.

To avoid this common pitfall:

  • Keep track of all your income sources throughout the tax year
  • Wait until you have all your tax forms before filing your return
  • Double-check that the income you report matches what's on your W-2s and 1099s

Don't forget to include income from side jobs, freelance work, and the gig economy.

Math Errors

Math mistakes can be a red flag with the IRS because they raise concerns about the accuracy of your tax return. Simple mistakes in addition, subtraction, or more complex calculations can prompt the IRS to take a closer look.

This is especially true if they significantly affect your reported gross income or deductions. Even though you may use tax software that does the calculations, errors can still occur when entering numbers.

To ensure this doesn't happen:

  • Double-check all the numbers you enter into tax software or forms
  • Use a calculator to verify your calculations if you're doing your taxes by hand
  • Take your time and don't rush through the process

While not all math errors result in audits, they can lead to further scrutiny. ​

Excessively Large or Numerous Deductions

Deductions can help lower your tax liability, but claiming too many or unusually large deductions for your income level can attract the IRS' attention. This is especially true for home office deductions and charitable donations. While you should claim all legitimate deductions, they need to be reasonable and well-documented.

To steer clear of red flags:

  • Keep careful records of all deductible expenses
  • Only write off legitimate expenses you can support with documentation
  • If you have unusually large charitable contributions, medical expenses, or other deductions, be prepared to explain and prove them
  • Consider spreading large deductions over multiple years if possible and allowed
  • Be especially careful with vehicle, entertainment, and home office deductions

If you have a business loss, make sure you can prove you're trying to make a profit.

Business Expense Errors

If you're self-employed or a small business owner, it's important to accurately report your business income and expenses. The IRS pays close attention to business tax returns, especially those with a lot of cash transactions.

Most self-employed individuals must also pay self-employment tax to cover Social Security and Medicare taxes. Failing to do so or improperly reporting business income or expenses can raise questions.

To avoid IRS scrutiny:

  • Keep detailed records of supporting documentation
  • Don't mix personal and business expenses
  • Don't underreport your business income
  • Only claim legitimate business expenses

Also, make sure you report business income and expenses on a Schedule C.

Foreign Income Omissions

Foreign income and accounts can commonly trigger IRS audits due to strict reporting requirements. Taxpayers must report worldwide income, including wages, interest, dividends, and rental income on designated forms. Discrepancies or omissions in reporting foreign income can prompt red flags.

To minimize heightened scrutiny:

  • Report all foreign bank accounts on your tax return
  • Ensure you're filing the proper IRS form(s) for your foreign assets/income
  • Disclose all types of foreign income

The IRS uses data from foreign financial institutions to identify unreported income.

Claiming Children Incorrectly

The rules for claiming children as dependents can be complex, especially in cases of divorce or shared custody. Taxpayers often erroneously claim children either who don't qualify as dependents or whom another taxpayer also claimed. This can potentially trigger an audit.

To avoid these mistakes:

  • Ensure you or your tax preparer understands the requirements for dependents
  • Only claim children who qualify as your dependents

It's usually a good idea to coordinate with ex-spouses or others to ensure children aren't claimed twice.

Erroneous Earned Income Tax Credit Claims

The Earned Income Tax Credit (EITC) is a valuable credit for low to moderate-income earners. The IRS closely scrutinizes EITC claims for this reason and because they're often claimed incorrectly.

To avoid incorrect EITC claims:

  • Make sure you meet the requirements for the EITC
  • Double-check your income and the number of qualifying children

You may also want to utilize the IRS EITC Assistant tool for verification.​

Rounding Numbers

While it might seem harmless to round numbers on your tax return, the IRS prefers exact figures. Too many rounded numbers can make your return look suspicious and prompt an audit.

To reduce those chances:

  • Use exact numbers from your tax forms and receipts
  • Keep detailed records to support your numbers

If you must estimate a figure, make it clear that it's an estimate.

Filing Late or Not Filing at All

Even if you can't pay the taxes you owe for the last year, you'll want to file your return by the deadline (usually April 15).  Simply not filing on time or at all is a red flag that can set off an IRS audit, especially if a taxpayer has a history of non-compliance.

Instead of taking that risk:

  • File on time whether you owe money or expect a tax refund
  • If you need more time to file the return, file for an extension
  • Pay any estimated taxes owed by the original deadline (even with an extension)

The IRS allows various arrangements for satisfaction of taxes owed, but they all require communication with the IRS.

Improper Categorization of Itemized Expenses

If you itemize deductions, it's crucial to categorize your expenses correctly. Misclassified expenses may raise suspicion that you're trying to reduce your taxable income improperly or that other parts of your return are also inaccurate. As such, these improper categorizations may trigger an audit.

To keep the scrutiny at bay:

  • Keep detailed records of all expenses throughout the year
  • Use clear, specific categories for your deductions that comply with IRS guidelines

Consider using accounting software or atax professional, like a CPA, to help organize your expenses.

Amended Returns

Under many circumstances, the IRS allows you to amend a filed return. The process requires an explanation and supporting documentation. While doing so is often necessary, amended returns go through a screening process. This can increase your chances of an audit, especially if you're making significant changes.

To reduce this risk:

  • Consider working with a tax attorney experienced in filing IRS amendments to avoid complications
  • Only amend your return if necessary (like correcting a major error or omission)
  • Provide a clear explanation for why you're amending the return
  • Include all relevant documentation to support your changes
  • Be prepared for the IRS to look closely at both your original and amended returns

For all of these audit triggers, it's important to make the most of these measures to mitigate your audit risk.

Avoiding Common Mistakes

Income tax laws and their specific requirements can be complicated to navigate. In some situations, it's easier to avoid these frequent errors than in others.

If you're still not quite sure how to reduce your specific audit risk, you'll likely want to touch base with a lawyer. Tax attorneys generally have experience dealing with the IRS and can help you determine the best way to proceed. You also generally enjoy a higher level of confidentiality with them than with other tax professionals.​

You Receive an Audit Notice

Of course, there's still the chance that you'll be selected for an IRS audit. That may be for one of these common mistakes, a different one, or no mistake at all.

Regardless, if you get an IRS audit notice, don't panic. Read the notice carefully. It should explain why your tax return is being audited. 

Then, take a breath.

Legal Guidance

It's highly advisable you find a qualified tax attorney to represent you during the audit process. A strong tax attorney will be well-versed in your rights as a taxpayer and can effectively advocate for you as you face the nation's most powerful taxing authority.

Identifying the right advisor might just be the simplest part of the audit process with Findlaw's dedicated directory of tax attorneys. It's arranged geographically so you can easily view contact, ratings, and other information for local experts. Just click on your state and narrow your search results by city if you'd like.

Whether you're trying to avoid an audit or you've already been noticed of one, give yourself the peace of mind that comes with legal guidance and informed decisions.

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