During the 2024 tax season, the IRS said it’s adding staff and technology to “reverse the historic low audit rates” on high-income taxpayers. Filing season can already be a stressful time for many, between the challenge of having to navigate countless forms and compile all of the correct information. The looming threat of an audit can ratchet up the stress of tax season even more.
According to the IRS, an audit is simply a review of your accounts “to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”
Regardless of whether or not you’re among the “high-income, high-wealth individuals” the IRS is targeting this year, your chances of being audited are still pretty slim: Of the roughly 165 million returns the IRS received in 2022, approximately 626,204, or less than 0.4%, were audited.
The IRS’ computer system is looking for deductions that are outside the norm for people in your profession.
Angela Lang/CNET
You’re required to file a Schedule C form if you have income from a business, but it complicates your return and can make it more likely you will be contacted by the IRS.
Greene-Lewis encourages taxpayers to claim every deduction they’re legitimately entitled to but to be extremely diligent in justifying those deductions, with details and supporting paperwork.
By and large, the IRS algorithm is looking for deductions that are outside the norm for people in your profession: If you’re a patent attorney but your travel expenses are three times what other patent attorneys claim, it could lead to closer inspection.
If you’ve taken a loss on your business for several years in a row, the IRS might want to make sure your business is above board.
“When the business owner makes up expenses and deductions, they tend to stick out,” Scott told CNET. “Under an audit, the IRS will require support and proof of deductions and if not provided these deductions will be disallowed.”
On a similar note, Scott added, “businesses that try to take incentives and credits that they don’t qualify for may cause a red flag.”
5. Your charitable deductions are outsized
If you itemize your deductions, you can claim cash donations to recognized charities — as well as the value of a donated car, clothes and other property. The IRS notices if these donations seem out of line with your income.
The agency’s computer program, the Discriminant Information Function system, continuously scans returns for such anomalies.
“If you claimed a charitable deduction that’s, like, half your income, it’s going to catch their eye,” Greene-Lewis told CNET.
The IRS puts caps on how much of your adjusted gross income can be deducted as charitable contributions. Some forms of donations can exceed this limit but doing so is likely to draw scrutiny, so you better have all your paperwork in order.
6. You have undeclared income
This is the biggie: Employers are required to file a W-2 with the IRS that reflects your earnings, or 1099s in the case of freelancers and contractors who earn more than $600.
The IRS automatically checks to see that your reported income matches up to what your boss submitted. It also gets notified of interest or earnings from savings accounts, investments and stock trades, as well as large gambling wins, inheritances and almost any other kind of income.
If you fail to report capital gains on cryptocurrency trades, it could trigger an audit.
Even if you work in a cash business — say, as a waiter or babysitter — unclaimed income can catch up with you.
“If someone is bringing their child to you to care for, they’re probably claiming your service on their taxes. So you need to make sure it all aligns,” says Willetts. “Even a small business like a house painter will require you to be bonded. That will eventually cross the IRS’s desk.”
Government agencies talk to each other, she added. If you declare $20,000 in income on your tax return but, when you apply for a home loan backed by the Federal Housing Administration, you put down $80,000, it will raise a flag.
According to Aprio’s Thomas Scott, small-business owners who don’t keep good records also tend to underreport, a major audit risk.
“Because the business owner hasn’t kept up with their income for the entire year, when it’s time to file their taxes they tend to estimate,” Scott says. “The problem with this approach shows up because most of the income earned has been reported to the IRS on a Form 1099. The IRS can match the income reported on the owner’s return to the income reported on Form 1099s.”
The IRS accepts tips from concerned citizens, so a disgruntled employee or aggrieved co-worker may be only too happy to report you for tax fraud, especially since the agency’s 2006 Whistleblower Program increased incentives to potentially between 15% and 30% of the proceeds that the IRS collects.
