The information in this article is up to date for tax year 2023 (returns filed in 2024).
Many people view the IRS as this big powerful monster that can garnish your wages and seize your assets. The reality is that IRS audits rarely happen. Out of the 162,037,000 tax returns that were filed last year, less than 1% were audited. The best way to stay out of trouble is to learn the red flags.
1. Earning A Lot of Money
Outside of people who report no adjusted gross income (AGI), nobody gets more attention from the IRS than high earners. In fact, the more money you make, the greater your chances of being audited.
According to the 2022 IRS Data Book, individuals with an AGI between $1 and $25,000 were audited at a rate of 0.4 percent. The rate increases to 0.7 percent for those with an AGI between $5 million and $10 million. If you manage to rake in over $10 million the odds jump to 2.4 percent.
2. Failing to Report All Your Income
When you receive copies of your W-2s, 1099s and other tax documents, the IRS does as well. So, don’t try to be slick and omit information when you do your taxes. If what’s reported on your return doesn’t match IRS records, you better believe you’ll be hearing from them. If you receive forms from your employer or client reporting the wrong income, contact the issuer to file a correction with the IRS.
3. Making Math and Clerical Errors
You’re sadly mistaken if you think math and clerical errors are no big deal. In 2022, the IRS identified nearly 17 million math errors on tax returns. As a result, almost 15.9 million taxpayers had to be notified. If you know math isn’t your strong suit, use tax software like ezTaxReturn to prepare your return. They make life easy by doing the calculations for you.
If the IRS makes a math error adjustment, it will issue you a notice of the correction and the balance due. You can accept the changes and pay the adjusted amount or request abatement within 60 days of receiving the notice. If you’re unable to pay the full amount, you can work with the IRS to set up a payment plan so you avoid any late penalties.
4. Claiming the Earned Income Tax Credit
The EITC was designed to help hardworking Americans who earn less than $63,398. But it is one of the most common places that people make errors. Be sure to double and triple-check your entries when claiming the credit because it’s known for tripping people up.
Returns claiming the credit also have a higher chance of being audited due to the high rate of false claims. In fact, the IRS estimates that 33% of EITC claims are paid in error.
5. Taking the Home Office Deduction
If you are self-employed and work from home, you may be able to deduct your home office space on your tax return. But the deduction has earned a reputation for triggering IRS audits because many people misunderstand and misuse it.
There’s nothing wrong with claiming the home office deduction if you truly qualify, but make sure you’re clear on the rules. The office room must be regularly and exclusively used for your business. It must also be your business’s primary location. If the space is sometimes used as your guest room or playroom for your children, then you cannot claim it on your return.
Make sure you keep clear and accurate records of your business and office expenses in case you need to prove your eligibility to the IRS. To reduce the risk of additional math errors, you can use the simplified option for home deduction to calculate your write-off. This allows you to deduct $5 for every square foot of your designated office space—up to 300 square feet—for a maximum deduction of $1,500.
6. Receiving an Early Distribution From Your IRA
When you don’t have any savings, sometimes you have no choice but to tap into your IRA when emergencies pop up. If you’re younger than 59 ½, you’ll pay a 10% early withdrawal penalty unless you qualify for an exception.
For instance, you can avoid the penalty if the money is used to pay for college or if you took up to $10,000 to buy your first home. The IRS has a whole list of exceptions for you to choose from. Just make sure it’s legit otherwise, you may find yourself sitting in an IRS audit.
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The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
