Contrary to popular belief, IRS audits don’t really happen at random.
An IRS Audit may be selected at random, but they are usually triggered by a red flag.
It is helpful to be aware of what red flags may trigger the audit.
In other words, the IRS only audits people who have knowingly or unknowingly done something wrong.
Some tax returns are selected for audit based on a comparison to random samples, something still must be ‘off’ for the audit to happen.
If you haven’t done anything wrong, no need to worry. You may need to provide modified forms or evidence of different things related to the return. I once had this happen with an error of a negative before a number that was missed by the IRS (the sign wasn’t large enough). I simply got to submit in a modified form.
In another example, I had a Healthcare Related Certification School get flagged for a large increase in revenue. They simply had to provide the supporting documents.
So, you don’t have to worry if you haven’t done anything wrong.
Keep in mind -- people who try to game the system are much more likely to trigger an audit.
Here are five of the most common ways this can happen.
(Disclaimer: This list should not be construed as any sort of encouragement to cheat on your taxes. It goes without saying that everyone should pay their fair share.
Sometimes, the items on this list can happen on accident.
The purpose of this post is to help prevent you from making what could end up being a costly mistake.)
1. Making Mathematical Errors on Your Return
Making a mathematical mistake on your tax return is one the easiest ways to catch the IRS’s attention and trigger an audit.
It’s just like they say: ‘ignorance of the law is no excuse.’
The same holds true when you miscalculate figures on your federal tax return.
Simply saying ‘oops, I made a mistake’ won’t clear you with the IRS when you’ve made a mathematical mistake. They don’t differentiate between honest mistakes and intentional deception, so it’s incumbent upon you to always be careful.
Here’s the bottom line: don’t make any mistakes.
If you do, correct them immediately.
- Check your work multiple times to make sure you didn’t input the wrong number somewhere. A failure to do this can result in onerous fines and a great deal of hassle.
- If you’re not confident in your math abilities, bring in a professional to prepare your taxes for you.
2. Hiding Parts of Your Taxable Income
A failure to report any portion of your taxable income is an almost guaranteed way to trigger an audit. Unfortunately, far too many people don’t understand how grave the consequences of this can be.
Although it’s possible to forget certain small parts of your earnings, it’s entirely up to you to report every dime that you make. It’s just not worth it to do otherwise. This is true for both contractors and regular employees. Many contractors think they can hide a little bit of income here and there, but the IRS is a lot smarter than you might think. They’ve already received the 1099s from all your clients and will easily discover the income you failed to report.
No matter how tempting it might be to hide a little part of what you’ve earned, report every cent of it to avoid an audit.
3. Claiming too Many Charitable Donations
Making charitable donations does more than make you feel good and help people less fortunate than you. It also allows you to make significant deductions on your taxes. If you go about it the wrong way, it will cause trouble.
This might seem like stating the obvious, but never report a donation that you didn’t really make.
Legitimate donations can also cause problems if you don’t have your receipts and proper documentation. Hold onto any materials that relate to your donations to avoid an audit. If you somehow lose any of this documentation, don’t even think about claiming it in the first place.
- Don’t report donations that you didn’t really make.
- Keep receipts for any donation you make and report.
4. Over Reporting Losses on Your Schedule C
This is a serious error that self-employed people often make. Over reporting losses on your Schedule C usually happens when you claim a personal cost as a business expense.
This is another situation that can be very tempting, but the IRS keeps a very close eye on the losses you claim.
IRS auditors tend to question anyone who reports a high level of business expenses on their return. If they look at your return closely, these deductions can easily trigger a very stressful audit. Again, the IRS knows what it’s doing and will always wonder how you can stay in business if you incur too many expenses.
- Report business expenses accurately.
- Don’t’ mix personal with business expenses.
5. Home Office Deductions
Many people who work remotely claim false home office deductions. These deductions can also be very tempting to claim, but the IRS has a very clear definition of what qualifies and what doesn’t.
Essentially, they say that you’re only allowed to make home office deductions if part of your home is reserved exclusively for doing business. In other words, you should never make a home office deduction unless you have a designated part of your home that is only used for work.
Please don’t try to outsmart the IRS with even the smallest deception. Answering emails while lying in bed doesn’t magically transform your bedroom into a designated work space.
The upshot of all this is easy to see: don’t try to cheat the IRS out of the money you owe them. It’s not worth the stress it causes and you’re very likely to get caught. And most importantly of all, it’s just wrong.
- Be honest with your work designated space.
In closing, use common sense, be honest, and keep the five triggers in mind. These actions will likely keep your tax return audit free!
About Katrina Julia Kiselinchev
MBA. CPA. CFE. CIA. NPC
Katrina Julia is a Lifestyle Entrepreneur + Creator + CEO of FLC. I love to simplify health, wealth, and business so others create a life and business they love and give back.