Megan is a Writer for The Cheat Sheet on money and career, health and fitness, and culture. She has a master’s degree in media studies from New School University and has been published in the Journal of Financial Planning and other publications.
Virtually all agents are paid 1099 (as are MLOs)! Or have their own corporation with K-1s, making them audit targets!
In 2022, nearly a quarter of Americans were worried about the possibility of an IRS audit, the highest level in 10 years.
Most lose sleep about something that never happens; of 146M taxpayers, fewer than 1%, (1.2M), had their returns audited, according to the IRS.
Budget cuts have reduced the number of audits considerably.
“No specific deductions raise a taxpayer’s chances of being audited, but there are actions that raise red flags & are to be avoided,” Dave Du Val, the chief customer advocacy officer for TaxAudit.com,.
Here are the top 15, 1 of which needs no explanation!
Surviving IRS Audits
IRS Statute of Limitations for Audits
1. You’re Rich
According to IRS data, middle-income taxpayers are rarely audited. Of all tax returns filed in 2014, the IRS did not examine over 99% of those with incomes between $25,000 and $200,000.
Your audit risk steadily climbs once your income crosses the $200K mark.
About 1.5% of taxpayers who made between $200,000 and $500,000 were audited, along with 8.42% of those earning between $1 million & $5 million.
2. You’re Very Poor (Or Look It)
The IRS tends to examine high-income taxpayers more closely, but a very low or no income return also raises red flags.
In 2015, 3.78% of returns showing no adjusted gross income were audited, along with 1% of those with less than $25,000.
3. Charitable Contributions Seem High
For example, the average charitable deduction people who earn between $75,000 and $100,000 claimed is $3,356.
How Government Liens Impact Buyers!
4. Work-Related Deductions Are Excessive
Excessive deductions for employee expenses that weren’t reimbursed are also likely to catch the eye of the IRS.
Work-related expenses, such as travel and business meals, are deductible, but some people pad their deductions by claiming things that are not eligible, such as dry cleaning.
5) Rental Property Expenses are Suspicious
Owning a rental property is a way to earn extra income, but it can also be a tax trap for novice landlords. Confused property owners might claim deductions incorrectly, subjecting themselves to an audit.
Inflated rental expenses are frequently caught in the IRS net.
Some deductions on Schedule E, where the income and expenses for rentals are reported, can be easily misinterpreted.
6) Expenses and Income Don’t Line Up
The IRS sees millions of returns annually, so it has a good idea of what’s normal for someone with a particular income or in a specific line of work.
Earning $50K a yr. & claiming $35k in employee expenses its a problem!
Claiming expenses not typical in your field — i.e. as significant mileage deductions if your work doesn’t typically require travel — is another red flag.
7. You’ve Claimed Someone Else’s Dependent as Your Own.
IRS Statute of Limitations for Audits
8. You’re Self-employed
Self-employed taxpayers who file a Schedule C are more likely to be audited than those who work for a traditional employer.
According to the IRS, 2% and 2.5% of individual tax returns with more than $25,000 business income were audited in 2014.
If you work for yourself, keep meticulous records of income and expenses, just in case the IRS comes calling.
IRS Statute of Limitations
9. You’ve Claimed Business Credits You’re Not Entitled To
Falsely claiming business tax credits is one of the “dirty dozen” tax scams the IRS specifically tells taxpayers to avoid. And there’s no statute of limitations for these!
10. You’ve Lied About Your Income
Lying about your income is one of the easiest ways to cheat on your taxes. It’s also one of the easiest ways to get caught.
The IRS matches the income you report on your return with the W-2 and 1099 forms it receives from your employer, broker, or anyone else who paid you the previous year.
11. You’re an Expat!
Americans living abroad filing taxes a nightmare due to a confusing array of forms. Those forms have a higher audit risk, says Greenback Expat Tax Services.
12. You Had to File an “Estate Tax Return”
Estate taxes only apply to estates of more than $5.45 million. If a rich relative passed away recently, a tax return for their estate will be scrutinized extra closely.
8% of estate tax returns were audited in 2014. The IRS audited 16% of returns for estates worth $5M to $10M and 32% of those worth over $10M.
13. Math Errors
Math mistakes catch the IRS’s attention,& taxpayers made 2.2 million in 2015. Fortunately, an audit isn’t inevitable because you added incorrectly.
You’ll get a notice saying you made a mistake and owe more money or get a larger refund. However, an error could expose your return to extra scrutiny.
14. You Make a Lot of Cash Transactions!
It’s hard to keep track of and easy to hide, so it’s difficult to know whether someone who deals with a lot of cash is paying all their taxes.
Brotman Law warned that running a cash business or having a job with a lot of cash (e.g., server/cab driver) puts you at risk for an audit.
The IRS also receives information from banks about large cash transactions and suspicious activity, which it uses to determine whom to audit.
15. You Made a Frivolous Tax Argument
People who hate taxes make convoluted arguments to get out of paying the IRS.
If you are a “tax protester,” you will be jailed, fined heftily, and audited back to when you worked at McDonald’s!
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