Avoid IRS Audits: Learn How to Steer Clear of 6 Common Tax Mistakes

The IRS is aiming to reverse historic low audit rates on high-income taxpayers this tax season by adding staff and technology. The IRS defines audits as reviews of accounts to ensure accurate tax reporting and correct tax amounts. 

However, the chances of being audited are slim, with less than 0.4% of the 165 million returns the IRS received in 2022 being audited. 

The IRS targets high-income, high-wealth individuals, but certain behaviors are more likely to be flagged. Audits are determined by a “statistical formula” that compares returns against other taxpayers. 

Despite the potential stress of filing season, the IRS’s efforts to target high-income taxpayers are expected to increase the stress of tax season.

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Navigating IRS Scrutiny

The IRS is aiming to reverse historic low audit rates on high-income taxpayers this tax season by adding staff and technology.

Some common mistakes that increase IRS scrutiny and how to prevent them:

1. Your return is incomplete

According to Jo Willetts, director of tax resources at Jackson Hewitt, IRS letters are most often sent for mismatched documents. The IRS gives benefits like the child tax credit, which allows parents to claim $2,000 per eligible kid. Individuals must prove eligibility for these benefits. 

The IRS will write if a person claims three children without newborns and no child tax credit. This doesn’t always imply they erred or tried to deceive the authorities. The IRS may be preparing a 2022 return for a May 2023 baby.

2. Your math or other information was wrong.

Informational and math issues may delay your tax return. By loading W-2s or 1099s into the system and retrieving data from past returns, electronic filing avoids these concerns. 

A skilled tax preparer can also reduce errors and miscalculations. These faults can still hinder the return process and cause unnecessary scrutiny.

3. Self-employed and misreport deductions

According to TurboTax tax expert Lisa Greene-Lewis, self-employed people should declare reasonable business costs. Receiving receipts and paperwork for deductions is crucial, she says. Tax deductions for home offices need usage for trade or company, not a dining table. 

Transportation expenditures must be verified, and deducting a personal car as a company expense is questionable. Business dinners are currently 50% deductible, down from 100% in 2021 and 2022. Record the meeting’s purpose, date, and attendee and save receipts to claim deductions.

4. You overstate business costs and losses.

Business income taxpayers should submit a Schedule C form, but this might complicate their return and increase IRS interaction. According to Greene-Lewis, taxpayers should claim all eligible deductions and defend them with facts and supporting proof. Patent attorneys who make substantial travel expenditures are targeted by the IRS algorithm for unusual deductions. 

Small business owners with poor recordkeeping typically make spurious deductions that might be prohibited in an audit. Businesses that take incentives and credits they don’t qualify for may also raise concerns.

5. Your charitable deductions are excessive

The IRS checks returns for abnormalities in gifts including cash donations to recognized groups and item values to discover outsized charitable deductions.

 Software called the Discriminant Information Function system continually checks returns for abnormalities. Charity deductions are limited by the IRS, and exceeding them may result in investigation. Thus, every paperwork is essential to avoid difficulties.

6. Undeclared income

The IRS requires employers to submit W-2s or 1099s for freelancers and contractors earning above $600. 

The IRS compares reported income to the boss’s, noting savings account interest, investments, stock transactions, gaming wins, inheritances, and other income. Failure to record bitcoin capital gains may result in an audit.

Unclaimed income can accumulate in various businesses, including cash waiters and house painters. Government agencies often communicate, raising audit risks. 

Small-business owners often underreport, as most income is reported on Form 1099s. The IRS accepts tips from citizens, and its Whistleblower Program increases incentives to potentially 15%-30% of collected proceeds.

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