IRS Audit Red Flags

The number of returns examined in the last ten years has declined due to budget and workforce cuts at the Internal Revenue Service (IRS). For the fiscal year 2019, an individual tax return had a 1 in 220 chance of being selected for audit. Ten years ago, it was a 1 in 90 event. The likelihood of being chosen drops to 1 in 466 if individual returns do not include a business or the earned income tax credit.

Even with the number of individual tax returns being examined each year, there is an increased chance of audit if any of the following red-flag items are reported (or not reported) on your return.

• Omitting income. Forgetting to include income on your tax return is the easiest way to get the IRS to scrutinize your return.  The IRS does match some tax reports they receive to individual tax returns.
• Filing a paper return. There is a greater chance of a math error when not using tax preparation software or an online e-file provider to avoid mistakes. A handwritten return with illegible writing may have the IRS taking a second look.
• Making less money than the prior year or significant fluctuations in income can increase the IRS’ attention on a return.
• Returns with no adjusted gross income reported have a higher examination rate than returns with an adjusted gross income of over $500,000. Returns with zero gross income often claim credits that can be incorrectly reported or calculated, resulting in large refunds.
• Sole proprietors who file a Schedule C with their tax return increase the chance of the return being audited by 350% over the average individual taxpayer. Specific areas of abuse for business expenses are meals, travel, and claiming 100% business use of a vehicle. Most vehicles are not used 100% for business, especially when there is not another vehicle for personal use.  Also, having a Schedule C business with consistent losses year over year may raise questions with the IRS.
• Large charitable contributions – especially on returns where the income is relatively low and charitable contributions are high. Overvaluing contributions of property is also an area that is often abused. Reporting itemized deductions higher than average for the income level can cause the return score to fall outside the norms and draw attention to the return.
• Claiming the Earned Income Tax Credit or the American Opportunity Tax Credit increases examination risk at all income levels. The complexity of rules for the credits is the main reason for errors, and many taxpayers claiming the credits are ineligible to claim them.

Contact Us

There is always a chance of your return being audited by the IRS, especially if you have any of the items mentioned above. If you have any questions regarding the above material, including questions on how to report items on your return, Klatzkin can help.  For additional information, click here to contact us. We look forward to speaking with you soon.

©2020 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult a tax advisor concerning your specific situation.