Twenty-five percent of Americans are afraid the IRS will audit them, according to a survey from Lexington Law. For people over 65 years of age, the number rises to 33%. The fear also manifests in documenting tax returns — 20% of people keep their tax records for more than 16 years.
There’s no question that audits are costly. For the 1.1 million audits performed in 2017, more than 96% led to additional taxes exceeding $28 billion. However, the IRS noted the chance of individual income tax returns being audited was only 0.6%. That figure remains relatively low for most people and businesses. The risk for others of being audited, however, can skyrocket.
What triggers an IRS audit? There are some obvious reasons that tax returns for individuals and businesses are flagged.
3 IRS Audit Triggers
Here are some of the most significant IRS red flags on tax returns.
1. Earning a Lot of Money
It makes sense that high earners are audited more than other individuals and businesses. After all, the IRS wants to maximize its return on investment. Add to the mix the idea that high earners naturally have more complicated tax returns — making returns more likely to contain IRS audit triggers — and it’s easy to see why those tax returns are audited more often than others.
For individual income tax returns, people earning between $200,000 and $1 million (0.8%) were audited at a slightly higher rate than average (0.6%) according to the Internal Revenue Service Data Book, 2017. The most noticeable increase came for individuals earning $1 million or more (4.4%). Businesses doubled in audit rates when moving from less than $100,000 (1.0%) in total gross receipts to more than $100,000 (2.0%). For corporate income tax returns, audit rates stayed around 10% to 20% until reaching the $1 billion (15.3%), $5 billion (26.8%), and $20 billion and more (58.4%) thresholds.
2. Making Simple Mistakes
One of the most straightforward IRS audit triggers concerns math mistakes and typos. Those types of mistakes can be a simple way to get audited, pointing to the importance of double- and triple-checking figures.
If simple mistakes are made and the IRS catches them, it’s natural to fear a lengthy, costly audit, but that’s rarely the case. “There’s the myth that if a paper comes from the IRS you should break into a cold sweat. You shouldn’t,” said Thomas Jensen, a financial advisor in Portland, Oregon, in an interview with Intuit. “More often than not, it’s a situation of, ‘Our records show this. Is that right?’ A lot of times it’s a very simple problem to resolve. You send the information or a check for the additional money, no penalties, and the case is closed.”
3. Claiming Too Many Deductions and Donations
The IRS computer system detects when tax returns are out of the ordinary. If individuals or businesses file returns that are out of line with other returns at the same income or profit level, IRS personnel flag the returns for further review.
What triggers an IRS audit often has to do with deductions and donations. The latter can be obvious. For instance, if someone donates $15,000 on a $40,000 salary, there’s a good chance something needs to be reviewed.
Business deductions can lead to a completely new set of IRS audit triggers. There are several common errors people make when claiming deductions for a business.
- Claiming home office deductions. Those deductions are some of the most common ways people cheat on their taxes. A home office deduction is a tough sell unless there’s space dedicated solely to the business.
- Claiming that a vehicle is used 100% for work. Instead, it’s better to track mileage and other auto expenses like gas, oil, repairs, tolls, parking, and more.
- Claiming an excessive amount of travel. Business owners can deduct certain meals, travel, and entertainment, but deductions above the norm for various professions are flagged by the system.
- Claiming business expenses for a hobby. Generally speaking, the IRS draws the line between a hobby being done for recreation or pleasure and a business being focused on making a profit. Three consecutive years of business losses could automatically cause the IRS to question whether the endeavor is a real business or simply a hobby.
Helping Individuals and Businesses Manage Finances
Individuals and businesses share the fear of being audited. More broadly speaking, they encounter a wide range of tax- and financial-related questions that require professional assistance.
If you’d like to pursue helping individuals and businesses manage their finances, an online accounting degree can help. Husson University’s program is offered in a flexible learning environment that’s versatile in method of study as well as opportunities upon graduation. You’ll be prepared to work in a variety of careers within the business world, thanks to customization options with academic minors and certificates, like the online certificate in data analytics. With a featured fifth-year Master of Business Administration (MBA) option, you can pursue advanced business education and prepare for the Certified Public Accountant (CPA) exam.
The program is full online. Husson University’s College of Business is still the largest school of its kind in Maine, with more than 1,375 students enrolled. Additionally, Husson produces more MBA graduates than any other business school in the state. More than 96% of Husson University graduates are employed or in graduate school within one year of graduation.