Home US Five things to watch out for in your tax return that could trigger an IRS audit – and how YOU can avoid them

Five things to watch out for in your tax return that could trigger an IRS audit – and how YOU can avoid them

by Jack
0 comment
Some returns will be scrutinized by the IRS to verify that income, expenses, credits and deductions have been reported correctly

With just over a month until the filing deadline, some Americans may be growing concerned about tax audits.

While the majority of tax returns are accepted, some face closer scrutiny by the Internal Revenue Service (IRS). This is to check whether income, expenses, credits and deductions have been reported correctly.

Although the agency selects some returns at random, it will mainly only audit returns with discrepancies or errors — and some problems are more likely to be scrutinized by the IRS than others.

During fiscal year 2022, the IRS closed 708,309 audits and assessed nearly $30.2 billion in additional taxes.

Here are five things you need to be aware of to make sure your return doesn’t trigger an audit.

Some returns will be scrutinized by the IRS to verify that income, expenses, credits and deductions have been reported correctly

Some returns will be scrutinized by the IRS to verify that income, expenses, credits and deductions have been reported correctly

Lack of income

For many taxpayers, missing income is easy for the IRS to detect because of its ‘automated underreporter’ program.

The bureau compares the returns it receives with documents from employers or financial institutions — such as W-2s — and verifies that the information matches.

While recent IRS enforcement has targeted high-income individuals, everyday filers may still face an audit if income streams miss a return.

This was told by Mark Steber, Chief Tax Information Officer at Jackson Hewitt CNBC that ‘mismatched data’ is the main thing that gets taxpayers into trouble.

“If you leave things (your return), it can get a question,” he said.

And underestimating the income can lead to a significant fine of 20 percent of the underpayment of tax.

Math error

Another of the biggest IRS red flags is math errors on a return.

In fiscal year 2022, the agency issued close to 16 million math error notices, Washington Post reported.

The most common error involved the pandemic discount credit – which was found on nearly 12 million returns.

Next was the child tax credit, which resulted in over 4 million math errors on individual returns.

Other mathematical errors included incorrect calculations of taxable income and miscalculations of Earned Income Tax Credit and Education Allowances.

A small math error by itself may not necessarily trigger an audit, but if your return is selected for a manual review, it could raise other issues, experts warn.

During fiscal year 2022, the IRS closed 708,309 audits and assessed nearly $30.2 billion in additional taxes (pictured: IRS Commissioner Danny Werfel)

During fiscal year 2022, the IRS closed 708,309 audits and assessed nearly $30.2 billion in additional taxes (pictured: IRS Commissioner Danny Werfel)

During fiscal year 2022, the IRS closed 708,309 audits and assessed nearly $30.2 billion in additional taxes (pictured: IRS Commissioner Danny Werfel)

Unusual tax breaks

Excessive tax deductions compared to what is expected for your income level can also be a red flag for the IRS.

Ryan Losi, executive vice president of the CPA firm Piascik, cautions that if your adjusted gross income is around $100,000 but you claim itemized deductions similar to filers who have a million-dollar income, it will raise eyebrows.

“You need detailed justification,” because if you can’t prove you qualify for a tax credit during an audit, you could lose the credit, he told CNBC.

He also recommends using actual expenses rather than estimated amounts for tax credits.

When you’re claiming four- or five-figure deductions, it’s “highly unlikely” your expenses will be round numbers, he added.

Exaggeration of business deductions

“A common misconception is that you can write off the full cost of a vacation just by doing a small business, or deduct the full cost of a car with only infrequent or occasional business use,” IRS spokesman Eric Smith told The Washington Post.

“None of these are true.”

For a business expense to be deductible, according to the agency, it must be ‘both ordinary and necessary’.

A regular expense is one that is common and accepted in your line of business. A necessary expense is one that is useful and appropriate to your business, trade or profession, it says.

Losses in small businesses

If you own a business, be sure to speak with a tax professional and read the IRS tax guide for small businesses.

If the agency questions whether you have a profitable business or whether the business is really more of a hobby, you may run into some problems.

The guidance reads: ‘If you do not run your business to make a profit, there is a limit to the deductions you can take.

‘You cannot use a loss from the activity to offset other income.’

WHAT TO KNOW THIS TAX SEASON

You may also like