While the thought of an IRS audit can be stressful, the reality is that only about 0.4% of individual tax returns are audited each year. However, certain red flags can increase your chances. Understanding these triggers can help you avoid mistakes and reduce your audit risk. Here are the most common situations that could lead to an IRS audit:
1. High Income Levels
The IRS is more likely to audit higher-income taxpayers. According to IRM 4.1.5.4, the IRS prioritizes cases where significant tax revenue is at stake. While the overall audit rate is low, those with incomes over $500,000 have a 1.1% chance of being audited. This jumps to 2.6% for individuals earning $1 million or more.
2. Unreported Income
Failing to report all income is a quick way to get the IRS’s attention. The IRS matches your tax return with the W-2s and 1099s they receive from employers and other sources. Any discrepancy, like income from freelancing or side jobs, could result in a CP2000 Notice, signaling a potential audit.
3. Large or Unusual Deductions
Claiming deductions that seem large relative to your income can raise red flags. For example, reporting $80,000 in income but claiming $40,000 in charitable donations may lead to scrutiny. Similarly, large deductions for business expenses or home office use could be questioned. The IRS uses DIF scores to identify unusual return patterns (IRM 4.10.5.2).
4. Claiming the Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is a valuable tax break for low-income families but is also heavily audited due to frequent errors. 1.2% of returns claiming the EITC are audited, which is higher than the general audit rate. If you claim the EITC, ensure that all information is accurate and supported by documents like proof of income and household size.
5. Self-Employment Income
Self-employed individuals are likelier to be audited because the IRS knows there’s more opportunity to underreport income or inflate deductions. High deductions for business expenses or home office use are common triggers. Keep detailed and accurate records to avoid issues.
6. Foreign Accounts and Assets
U.S. taxpayers must report foreign accounts if their value exceeds $10,000 at any point during the year. Failing to do so can trigger an audit and severe penalties. The IRS partners with foreign governments to find unreported foreign income, so compliance is key.
7. Round Numbers on Your Return
Filling out your return with rounded numbers, like exactly $5,000 for business expenses or $10,000 for donations, can look suspicious. While rounding to the nearest dollar is fine, avoid numbers that seem “too perfect.”
While the overall audit rate is low, knowing what behaviors increase your risk can help you avoid being flagged. By keeping accurate records and filing a precise, honest return, you can reduce the likelihood of facing an audit.
