The potential of an IRS audit looms over taxpayers throughout the country when they submit their tax returns. In reality, the chance of being audited is very slim. For fiscal year 2022, fewer than half of 1% of all tax returns were audited.
Still, no one wants to be part of that “select” group. Whether a taxpayer is scrupulously accurate with their return or they fudge a few numbers in their favor, there are some factors that can serve as “red flags” for the IRS and make a return more likely to be subjected to added scrutiny.
Income over $1 million
Higher-income people are more likely to be audited than middle- or lower-income taxpayers. That makes sense since there’s more money at stake. Taxpayers whose annual income is over $1 million face a higher probability of audit than those with incomes under that. However, there are other red flags that could make anyone more likely to be audited.
People who are employees of a business or other organization typically receive a W-2 form that reflects the income they were paid for the previous year. However, many people receive income listed on various types of 1099 forms. These forms are typically how independent contractors’ or “freelancers” income is reported. Interest income reported by financial institutions and investment firms are also on 1099s.
Remember that all of this income is reported to the government as well as the taxpayer. Not reporting all of your income on your tax return can get the IRS’s attention. That’s why it’s a good idea to know what 1099s and W-2s you should be receiving so that if you don’t get one, you can track it down.
When entering dollar amounts on your tax return, you should round to the nearest dollar, but not to the nearest $100 or $1,000. If a tax return is filled with only round numbers, the IRS will assume that the taxpayer didn’t bother to include accurate numbers or just guessed. That’s a definite red flag.
Excessive credits and/or deductions for your income
Many credits and charitable donations are tax deductible, and everyone should take any deductions they can. However, if they don’t make sense based on the reported income, the return could be flagged for audit. A retired person with considerable savings but little reportable income may make large charitable contributions, but the IRS will initially look only at the numbers when determining whether to dig a little deeper.
If you’re notified of an impending audit, don’t panic. With experienced legal guidance, you can better resolve the issue and minimize any potential consequences.