These 3 Red Flags on Your Tax Return Could Increase Your Chances of an IRS Audit, Experts Warn

Everybody hates the thought of undergoing a tax audit. Fortunately, nearly nobody ends up getting audited.

In 2021, only 0.2% of tax filers with incomes below $1 million received an audit notification from the Internal Revenue Service. based on the latest IRS Data Book That's approximately 1 person out of every 500.

People who undergo audits often commit particular yet frequent errors that catch the attention of the IRS. Below are three such errors to be cautious about along with steps to prevent them.

1. You fail to disclose all of your earnings.

Should your earnings come from various origins, the IRS requires you to declare every bit of it.

If anyone gives you funds throughout the year—from bosses to investment companies—they send records like W-2s and 1099s right to the IRS. Should your tax filing not align with what the IRS has received, it might trigger red flags, warns Daniel Geltrude, a certified public accountant and the founder of Geltrude and Company LLC. .

Geltrude mentioned that perhaps you missed seeing the 1099, but rest assured, the IRS has it," she stated. "Since there’s now no matching record, here we go.

A 1099 form indicates the amount of taxes you should pay based on income earned from freelancing, contracting, or gig jobs, as well as various kinds of one-off payments. Several kinds of 1099 forms exist. They function similarly to W-2 forms, except for one major distinction: you might get a 1099 as late as mid-to-late February, whereas most W-2s must be distributed by employers by January 31 due to regulatory requirements.

To ensure you report all your earnings accurately and completely, make sure you've obtained every 1099 form before filing your taxes with the IRS. You might need to reach out to your income providers during tax season or maintain a record of all your income streams throughout the year to accomplish this.

2. You state significant or uncommon tax write-offs.

According to Geltrude, claiming excessively high deductions can lead to an IRS audit.

Common deductions Include charitable donations, interest paid on student loans, or expenses related to your freelance work when filing. Nevertheless, should these figures not align logically with your reported earnings or constitute a large part of your income, they might trigger scrutiny from the IRS.

Geltrude warned 5.180.24.3 that if you reported $100,000 in income and claimed a $70,000 charitable deduction, it would raise some eyebrows.

It might also cause surprise if your deductions abruptly appear dissimilar from what they usually do, as noted by Erica James, a certified public accountant, certified financial planner, and director. Signify Wealth , told 5.180.24.3Make It last year .

"She mentioned that substantial variations in your claimed deductions and tax credits from one year to another might trigger an audit." James also noted that if the deductions you claim are legitimate and properly documented, an audit would probably just ask for extra paperwork rather than conducting a thorough examination.

To prevent problems with your deductions, the answer is straightforward, James stated: "Ensure you maintain proper records."

3. You run a side gig or own a small enterprise but your record-keeping isn’t up to par.

Entrepreneurs running small businesses as well as individuals with side gigs can submit a Schedule C form When filing their tax returns, individuals must report earnings derived from their entrepreneurial endeavors to the IRS. Although running a business or earning additional income can be an effective strategy to achieve one’s fiscal objectives, self-reported enterprises frequently attract increased scrutiny from auditors.

"Every enterprise that earns revenue falls under the examination of the IRS," explains Ed Slott , a licensed Certified Public Accountant and the founder of IRAHelp.com .

Based on Slott, the most effective method to assist yourself is keep good records Not only does maintaining well-organized business documents help you report precise figures during tax season, but it can also put you in favorable light with the IRS should an audit occur.

According to Slott, simply maintaining all files pertaining to your business within a dedicated folder can be an excellent initial step. Additionally, if managing your taxes over the course of the year might interfere with running your company effectively, it could be wise to enlist the assistance of an accounting specialist who can assist you in organizing your business paperwork, as per his advice.

"Even if [you] understand QuickBooks and all of that, that's not what [you] should be spending [your] time on," Slott says. "[You] should be spending your time on cultivating business."

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