How to Avoid a Tax Audit

Reduce your risk of a tax audit by avoiding common audit triggers

By Andra DelMonico, J.D. | Reviewed by Canaan Suitt, J.D. | Last updated on June 26, 2024 Featuring practical insights from contributing attorney Vivian D. Hoard

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As tax season rolls around each year, the topic of audits also seems to arise. It is a dreaded experience that no one wants to have. Thankfully, the Internal Revenue Service (IRS) audits a small percentage of the millions of people who file tax returns. Taxpayers can reduce their risk of being subject to an audit by understanding how the IRS performs audits.

Why Do People Get Audited?

IRS tax audits ensure that tax laws are followed. The IRS will use the auditing process to verify that someone followed the filing process correctly and reported the correct information. Audit rates are fairly low compared to the number of taxpayers filing each year.

The IRS chooses individuals for an audit in two ways. The first is a random selection process. A computer uses a statistical formula to compare filed tax returns to established normal standards with previously filed similar returns. The IRS runs the National Research Program, which performs a different audit process. This research helps the IRS establish normal behavior and income tax return standards based on random sampling.

The second method for choosing who to audit is based on red flags that will trigger an audit. Generally, taxpayers who are low-income or high earners are more likely to get audited. The IRS considers these groups of people more likely to report their income or take incorrect deductions and credits. Another common group of individuals audited are self-employed or small business owners. The IRS considers these individuals likely to misreport income, claim excessive business expenses, or be connected to other audited taxpayer issues.

Vivian Hoard is a tax attorney in Atlanta, Georgia, with Fox Rothschild LLP. She explains how the IRS continually adapts its approach to performing audits based on taxpayer filing behavior. “The IRS issues notices on what it looks for when performing audits. If you go to the IRS’s website, you can see a list of the most common audit-triggering activities. They keep updated lists of activities, and you are very likely to be audited if you’ve engaged in any of those activities.”

[If you receive a tax audit], speak to your accountant. The accountant may notice the issue right away and be able to resolve it. But if they can’t resolve it, then certainly you need to speak to a tax attorney, particularly if the government is trying to collect.

Vivian D. Hoard

What Can Trigger a Tax Audit?

If your tax return gets selected through the random algorithm, there is nothing you can do to prevent it. You also can’t control if other people get audited, which triggers an audit of your tax return because you two are linked in some way. Thankfully, you can reduce your risk of an audit by not committing any of these audit triggers.

1. Failing to File

If you never fill out and send in your tax return, you failed to file for that tax year. However, failing to file can have a different definition to the IRS. For example, forgetting to sign your tax return can result in the IRS considering it an invalid tax return, so you never filed.

2. Incorrectly Reporting Income

Failing to include income or inaccurately reporting your income will trigger an IRS audit. Unreported income means you earned money in some manner and did not report it on your federal tax return. Underreported income means you reported an income stream, but you reported less than what you actually earned. This could be reporting an amount that is lower than what is listed on your income tax forms. Examples of this would be not reporting self-employment income from a side hustle as an independent contractor, not including gambling or lottery winnings, or not listing a foreign bank account.

It could also mean reporting the right amount but reporting an excessive amount of expenses that would effectively lower your total income. Examples of this would be writing off losses from a hobby or claiming inappropriate rental losses.

3. Errors

Discrepancies and errors are some of the most prevalent audit red flags. They clearly signal to the IRS that you may not have paid the correct amount of tax debt. Check that the income reported on your tax return matches the income listed on your Form W-2 or Form 1099. Check that there are no errors on the Schedule C that lists business income and losses.

4. High Earners

Being a high earner could increase the likelihood of experiencing an audit. This would apply to people who individually make more than $200,000 per year or are worth over $10 million. The IRS regularly updates its approach to audits, so speaking with a tax attorney can help you understand the likelihood of an audit.

5. Abnormal Deductions and Credits

While many tax deductions and credits are available, not everyone will qualify for them. Claiming deductions and credits you aren’t entitled to will create a bigger risk of getting audited. Common inappropriately claimed credits include:

  • American Opportunity Tax Credit
  • Health Premium Tax Credit
  • Research and Development Credit
  • Foreign Earned Income Exclusion

Common incorrectly claimed deductions include:

  • Charitable deduction
  • Alimony deduction
  • Home office deductions
  • Dependents

Don’t be afraid to claim deductions and credits, as they will reduce your tax liability. However, have the proper documentation to validate your claims in case you are audited.

6. Certain Types of Activities

Certain activities are more likely to trigger an audit than others. For example, if a taxpayer operates a marijuana business, the IRS is more likely to take a closer look. These businesses have a high rate of return from the IRS because incorrect deductions are common.

Trading in cryptocurrency can also trigger an audit because it is difficult to verify accurate reporting. Often, taxpayers inaccurately report their virtual currency income.

A taxpayer taking an early payout from their IRA or 401(k) account can trigger an audit. There are penalties that come with taking money out of your retirement account early. The IRS wants to ensure you report the correct amount taken out and pay your full penalty.

Finally, individuals who exhibit suspicious behavior can trigger an audit. This could include frequently amending their federal tax returns, inconsistent earned income patterns, or claiming deductions without submitting the qualifying documentation.

Reducing the Likelihood of an IRS Audit

Taxpayers can reduce the risk of an audit by taking a few steps when preparing and submitting their income tax returns. Start by reducing the chance of making errors or incorrectly reporting your income, deductions, and credits. Wait to start preparing your income tax return until you have all of your tax forms. Make sure you file your taxes by the deadline. Only claim legitimate deductions and credits that are available to you.

Many people use tax software like TurboTax to prepare their own taxes. The problem with this is that it puts you at risk of making errors. High earners or those with complicated tax situations may want to work with a professional tax preparer, such as a certified public accountant (CPA). Getting the help of a tax professional can ensure you pay your tax liability and reduce the risk of red flags that would trigger an audit.

After filing, update and amend your tax return if needed. Generally, the IRS has three years from the tax due date to perform an audit. There is no time limit if you fail to file or if the IRS can prove civil or criminal fraud.

Hoard explains the statute of limitations that the IRS must follow when performing audits. “The general rule is the IRS has three years from the time you filed the tax return to audit and propose adjustments to the return. Otherwise, the statute of limitation bars them from making any adjustments to the return. There are exceptions. There’s a six-year statute of limitations for a 25 percent understatement of income on the return. If the government says you committed fraud, the statute never runs.”

Best Times to File Taxes to Avoid an Audit

The best time to file your tax return is before the deadline of April 15th. However, the IRS warns tax filers not to rush to submit their tax return. While we all want our tax refund as soon as possible, rushing to file in January puts you at greater risk of math errors.

The IRS recommends waiting until you have all of your documents. Most tax forms have a deadline of January or February for taxpayers to receive them. A small few have a deadline of March. This means you should plan to do your tax filing in the middle of the tax season, around the beginning of March.

What to Do If You Get an Audit

Despite following all of the best filing practices, you may still find yourself facing an IRS audit. You will be notified by receiving a letter directly from the IRS notifying you of audit selection. The IRS will never notify you of an audit by email or telephone. The letter will outline which documents the IRS wants to see and inspect more closely than in your federal tax filing. This could be bank records, receipts, or other statements. You have 30 days to respond to this letter.

Hoard suggests what someone should do when receiving an IRS audit letter. “Speak to your accountant. The accountant may notice the issue right away and be able to resolve it. But if they can’t resolve it, then certainly you need to speak to a tax attorney, particularly if the government is trying to collect.”

It’s essential to keep good records so you can provide what the IRS asks for. Keep records for at least three years. In some situations, the IRS may ask you to extend this time. While it is tempting to say no, this can work against you. Refusal of an extension can prompt the IRS to make a determination without further investigation. This can result in owing additional taxes that you may not have owed if you allowed for a full investigation.

The time it takes to complete the audit will depend on several factors. The complexity of the issues, the availability of documents, and the scheduling of meetings can prolong the process. Working with a tax lawyer can help you navigate the process and advocate for your rights. At the end of the audit, the IRS will issue a determination. You can agree or disagree with it.

If you have received a notice of audit from the IRS, do not wait. You have a short amount of time to respond correctly, or you risk the IRS moving forward with the determination of owed additional taxes. Contacting a tax law attorney can help you advocate for your rights and help you respond to the IRS appropriately. Remember, an IRS audit isn’t automatically bad and doesn’t mean you automatically owe more money. A lawyer can guide you through the audit process and help you understand your options.

Visit the Super Lawyers directory to begin your search for an experienced tax attorney. For more information on these legal issues, see our overview of tax law.

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