Preparing a tax return can be stressful. If you are being honest or use a professional you can breathe a little easier since IRS audits don’t happen to many people.

The IRS has audited fewer returns since 2010 due to federal budget cuts that have affected staff size. According to a 2022 GAO report, only 0.25% of all individual returns were audited in 2019, down from 0.9% in 2010.1

That said, taxpayers commonly make a few mistakes that increase the chance that an agent will take a second look at their returns.

IRS computer system can trigger an audit.

The IRS computer system called the Discriminant Information Function (DIF) is designed to detect anomalies in tax returns. It scans every tax return the IRS receives. It’s looking for things like duplicate information—maybe two or more people claimed the same dependent—as well as deductions and credits that don’t make sense for the tax filer.

The computer compares each return to those of other taxpayers who earned approximately the same income. For example, most people who earn $40,000 a year don’t give $30,000 of that money to charity and claim a deduction for it, so your tax return is more likely to be flagged by the DIF system.

Can income affects triggering of audits?

The IRS isn’t going to waste its time on an audit unless agents are reasonably sure that the taxpayer owes additional taxes and there’s a good chance that the IRS can collect that money. This puts a focus on high-income earners.

According to the IRS Data Book, the majority of audited returns in 2019 were for taxpayers who earned $500,000 a year or more, and most of them had incomes of over $1 million. Additionally, the only income ranges that were subject to more than a 1% chance of an audit were $5,000,000 and over.

According to IRS statistics, you’re safest if you report income in the neighborhood of $25,000 to less than $500,000. These taxpayers were audited the least in 2019.

Additional items that can trigger an audit.

  • Large cash deposits
    Under the Bank Secrecy Act, various types of businesses are required to notify the IRS and other federal agencies whenever anyone engages in large cash transactions that involve more than $10,000. The idea is to thwart illegal activities.A side effect is that you can expect the IRS to wonder where that money came from if you plunk down or deposit a lot of cash for some reason, particularly if your reported income doesn’t support it. The IRS will be notified if you make a large deposit over the $10,000 amount. You should be prepared to show how and why you received that money if you file a tax return.Also “structuring” your deposit can trigger this. If you make two or more transactions that are less than $1,000 individually but that adds up to more than the $10,000 threshold. Banks are required to report deposits that are for amounts less than the threshold if they might indicate illegal activity.
  • Claiming too many itemized deductions
    You may trigger an audit if you’re spending and claiming tax deductions for a significantly larger amount of money than most people in your financial situation do.
  • You’re self-employed
    Deductions that are above the norm for your profession can trigger an audit. Don’t stretch the truth when filling out your tax returns. If you use your personal car for business and you want to deduct your expenses or mileage, don’t say that 100% of your travel was solely for business purposes if you have no other vehicle available for personal use. You presumably drove to do personal errands at some point.
  • Your business is home-base
    You must use your home office area only for business. You and your family members should not do anything else in that space. Review IRS Publication 587 if you’re planning to claim a deduction for a home office.
  • You own a cash business
    Operating a mostly cash business can put you on the IRS’s radar as well. Businesses that fall into this category include salons, restaurants, bars, car washes, and taxi services, according to the IRS. Because there’s so much cash, it would be easier for these business owners to hide some of their income from the IRS.
  • You have investment income
    Keep track of all your investment income so you can accurately report it to the IRS.

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