Tax Preparation Mistakes That Can Trigger an IRS Audit

After tax season, the Internal Revenue Service (IRS) begins examinations, or audits, of returns that are filed. Audits can be frustrating or even worrying for taxpayers, but there are ways you can limit your risk of an audit and methods to prevent an audit from becoming a larger issue. You should be aware of tax preparation mistakes that can trigger an IRS audit, and how to effectively handle an audit if you face one.

When Does the IRS Audit Taxes?

The IRS conducts audits for several reasons, including the following:

1. Random selection: Taxpayers can be randomly selected, often based on whether or not their taxes match the norms created by other taxpayers the same year.
2. For-cause. The IRS selects returns to audit based on errors in your taxes or discrepancies in your information.
3. Related examinations: You can be audited if you had transactions with other taxpayers that were selected for an audit for either of the prior reasons.

IRS exam coverage, or audits, in fiscal year 2024 led to $36.8 billion in recommended additional tax and assessments. By September 2024, the exam coverage rate in 2022 was:

• 0%, for those with an income of over $10 million
• 1%, for those with an income between $5 million and $10 million
• 1% for those with an income between $1 million and $5 million
• 6% for those with an income between $500,000 and $1 million
• 1% for those with an income between $50,000 and $500,000
• 2% for those with an income between $25,000 and $50,000
• 4% for those with an income between $1 and $25,000
• 3% for those with no total positive income

Because the statute of limitations had not passed when these percentages were reported, they are likely higher now. However, this shows that people with high incomes are more likely to be audited by the IRS.

What Mistakes Can Lead to Audits of Your Taxes?

Making mistakes can increase your chances of an audit, although not all mistakes will cause an audit. Sometimes, the IRS will just ask you to make a correction. Other discrepancies can lead to penalties, audits, or more serious consequences. Some mistakes to look out for include:

1. Taking overly large deductions, losses, or credits: Don’t overestimate the deductions or credits you are owed. Credits might include child-related tax credits or charitable donation credits, while deductions might include business expenses. Losses might include casualty, gambling, or business losses. When these things are higher than the average or do not match other information the IRS has about you, it can lead to an audit.
2. Underreporting your income: Math errors or filing your return before you’ve received all your income can lead to this issue. Your income is not only reported on your tax return, but also by your employer or a third-party paycheck service. When these amounts don’t match, the IRS may audit your taxes to find the discrepancy.
3. Conflating personal and business expenses: Business taxpayers or self-employed individual taxpayers can deduct expenses for certain things from their taxes, but cannot deduct personal expenses.
   When these taxpayers deduct significant amounts from their taxes, and the IRS suspects they are not business-related, this can lead to an audit. Keep personal and business records separate and only take business deductions for actual business expenses.
4. Undervaluing assets: For returns involving property, it is crucial that you accurately value a business, real estate, or high-value personal property. The IRS has its own resources to assess property and other assets to determine if you are paying taxes correctly. Failing to get a professional appraisal of these key assets can cause issues and lead to an audit.
5. Foreign bank account errors: These errors include failing to report that you have a foreign bank account or failing to provide sufficient identifying information about the account you report.

An audit doesn’t necessarily mean the IRS thinks you made the error on purpose. It only means that the agency wants to check the information and obtain proof that you took the correct deduction or reported the right amount of income.

FAQs About Tax Preparation Mistakes That Can Trigger an IRS Audit

What Gets You Flagged for an IRS Audit?

You can be flagged for an IRS audit for discrepancies in your taxes compared to the norm for that tax year, through random selection, or if you did business with another taxpayer who was audited. While you cannot always prevent audits, you can take steps to limit your risk, like checking your math, ensuring you take reasonable deductions, being sure you report all your income, and valuing your assets correctly.

What Income Is Most Likely to Get Audited?

Those with significantly high incomes are more likely to get audited, or those who report no total positive income. Those without income had the same examination coverage in 2020 as those earning between $1 million and $5 million. Those with income higher than $5 million had much higher audit examination rates. Income that is for a business is also more likely to be audited compared to individual income returns.

When Is the IRS Most Likely to Audit Tax Returns?

The IRS is likely to audit tax returns for things like high business expenses, substantial credits or deductions, cryptocurrency transactions, having a foreign bank account, casualty losses, rental income, and large donations. Having clear documentation of transactions or accounts is crucial when you take deductions, credits, or report these things. Although your risk of an audit may be higher, this documentation helps you quickly prove what you stated on your taxes.

When Should You Hire a Tax Preparation Lawyer?

You should hire an experienced Jacksonville tax preparation lawyer to help you easily and successfully prepare and file your taxes, which can benefit any taxpayer. However, some taxpayers see much higher benefits from working with a tax preparation lawyer, such as those who own a business, have numerous sources of income, or owe the IRS tax debt. An attorney helps you avoid errors that can increase the risk of an audit. An attorney can also help you navigate an audit.

Finding the Right Tax Preparation Attorney

At TaxSmith, LLC, we can help you prepare your taxes, minimizing the likelihood of costly errors and improper returns. We offer affordable services, a flexible schedule, and open availability to discuss your concerns. Our firm can also help if you are facing an audit, protecting your rights throughout the process and working towards a beneficial outcome. Reach out to us today.