Tax time is stressful enough without the IRS knocking on your door. Luckily, SuperMoney is here to help. If you play your cards right, you can lower your odds of ending up on the wrong end of an audit. We’ll teach you how to identify IRS audit triggers so that you can stay safe this tax season.
What is an IRS audit trigger?
In order to quickly process millions of tax returns, the IRS has certain flags that will automatically trigger an audit. If your tax return contains one of these flags, that doesn’t necessarily mean you’ve done something wrong. It just means that something on your tax returns has been used by others to defraud the IRS in the past. As long as your return is accurate and honest, you should have no problem.
However, accuracy is not always enough — you also need to be able to prove your claims with evidence. That’s why it’s crucial that you hold onto your receipts and keep rigorous records, especially of income which might trigger an audit.
What if I have IRS audit triggers on my tax return?
If you have audit triggers on your return, it is very likely that you’ll be audited. The audit can be conducted either by mail or in person, and there are three possible outcomes. The IRS may:
- Decide that all is well, and make no changes on your return.
- Propose a change that you agree to. You may agree to pay more taxes, interest, or a penalty (or in rare cases, forfeiture of property or jail time).
- Propose a change that you understand, but disagree with. At this point, you can appeal or enter into a mediation with the IRS.
To get that first outcome, you’ll have to know what aspect of your tax return triggered the audit, and how to prove those claims. We’ve listed the top audit triggers below. Plus, find info on how to know if you’re in the wrong, and what documents you’ll need to use to prove your claims.
Armed with this knowledge, you can ward off any fines, levies, or other legal ramifications from the IRS.
The top 9 IRS audit triggers
1. Mis-reporting your taxable income
Your employer(s) don’t only send your W-2 and 1099 forms to you — they also send a copy to the IRS. As such, if you misrepresent your income on your tax return, the IRS will find out.
Perfectly OK: Making a small math error. The IRS will correct that.
Not OK: Estimating or fudging how much you’ve made.
The Proof You Need: Compare your 1099 or W-2 against your own records. If you think it is wrong, inform your employer and ask them to file a corrected 1099 or W-2 with the IRS.
2. Misrepresenting your gambling earnings/losses
If you won the jackpot at Vegas this year, congratulations! However, you will have to pay taxes on your earnings.
You might want to keep your winnings “off the books,” but be warned: casinos send their records to the IRS every year. That means that if you fail to report your winnings, the IRS will find out about them from the casino, and you will get audited.
The same goes for losses. You can deduct your losses from your taxable income — but make sure not to deduct any more than you really lost. Otherwise, you’ll have the IRS knocking at your door in no time.
Perfectly OK: You won big (or lost big) at the slots, and reported it accurately on your tax return.
Not OK: You won big and failed to report it; or you deducted more money than you really lost.
The Proof You Need: Keep thorough records of your gambling wins and losses.
3. Huge donations on a small budget
If you claim to be making huge charitable donations when you barely have enough to afford your day-to-day expenses, the IRS may get suspicious.
Perfectly OK: You gave a generous donation to your alma mater and then suddenly lost your job, making your income lower than expected.
Not OK: You’re getting creative with your charitable deductions. (“That 1995 Camry I gave to charity is worth at least $15,000!”)
4. Steak dinner with your clients
According to the IRS, you can deduct “non-entertainment related meals” as a business expense. However, they must be directly related to your trade or business, and the IRS must deem them “ordinary and necessary expenses.” That means that a big, luxurious night out with your clients probably won’t qualify.
The rules that govern this deduction are strict, so it’s a good idea to read up on them before asking the government to pay for your drinks.
Perfectly OK: Deducting 50% of the cost of a reasonably priced meal where you entertained potential clients for your business.
Not OK: Deducting the cost of a lavish steak dinner with rare champagne, and then trying to deduct it again as a travel expense. Or deducting half the cost of a concert ticket you bought from a scalper who charged you $150 more than face value. To see more instances, read this publication from the IRS.
The Proof You Need: Keep your receipts. Record dates and times, descriptions of each expense, the business purpose, and the business relationship.
5. Claiming 100% business usage of a vehicle
If you use your car to make deliveries, you may want to claim a deduction for the vehicle. But if you’re also using the same vehicle to shuttle your kids to lacrosse practice, it won’t qualify. If you only own one vehicle and try to claim 100% business usage, the IRS will probably get suspicious.
Perfectly OK: Your car is used solely for delivering wedding cakes to your clients.
Not OK: You drive for Lyft or Uber, but you also drive to the store to pick up your groceries.
The Proof You Need: Keep a record of your mileage. Make calendar entries specifying your destination and business purpose every time you use your car.
6. Your home office
With the rise of the gig economy, more and more Americans are working from home. However, just because you work out of a given room doesn’t make it a home office. In order to qualify for this deduction, the space must be exclusively dedicated to your work. That means that the workspace you set up at your kitchen table does not qualify.
Perfectly OK: A study where you keep your computer, phone, bookshelves and other supplies for work. You do most of your work here, and never use it for any other purpose.
Not OK: A desk with a computer in the corner of your living room or guest bedroom.
The Proof You Need: If you want to take this deduction, make sure to read IRS Publication 587.
This one seems obvious, but it is the most common cause of audits. If the numbers on your tax return don’t add up, the IRS will have to approach you to get them fixed.
Perfectly OK: Small math errors. The IRS will fix these.
Not OK: Claiming the wrong deductions and credits, filing under the wrong status, or stating the wrong income.
The Proof You Need: Double- and triple-check your work before filing. Also, keep meticulous records and proof for deductions and credits. If you’re worried, consider using tax preparation software that will check your work for you. Browse your options here:
8. Round numbers
In real life, math is rarely simple. If your tax return is covered with tidy little numbers, the IRS will suspect that you’re fudging the numbers.
Perfectly OK: Rounding to the nearest dollar.
Not OK: Doing things from memory and rounding to the nearest hundred.
The Proof You Need: Keep documentation for your deductions and credits. Also, use real (not-rounded) numbers on your forms so they match your receipts and other records.
9. A “business” that doesn’t make money
Say you claim to run your own business full-time. But the IRS can see that your business has lost more money than it’s made for three years out of the past five — or that you’ve never made money at all.
If this is you, odds are good that you’ll get audited. That’s because every year, a ton of taxpayers try to pass off their hobbies as a business in order to deduct the hobby’s costs.
Perfectly OK: Things didn’t go well with your business this year or last year, and you took a loss.
Not OK: You have an expensive, full-time hobby (like owning a vineyard or photography), and you’re not even trying to make a profit.
The Proof You Need: Hold onto all the proper documentation to prove that you made a profit for three out of the last five years.
Putting it all together
If you plan to take one or more of these deductions, odds are decent that the IRS will audit you. But don’t worry! As long as you hold onto your receipts and keep rigorous records of your spending and earning behavior, you’ll be safe, even in the event of an audit.
Worried that an audit might unearth accidental errors on your tax return? Filing your taxes using tax preparation software can bring you peace of mind. Or if you’ve already filed and you’re preparing for an audit, consider hiring a tax attorney to act as your advocate. Their expertise and experience will help you get through the audit without any serious consequences.