3 FAQs on Red Flags for Tax Audits
Even if you do everything right, there’s no guarantee your tax return won’t be audited. After all, the IRS does choose some returns at random for auditing.
There are, however, certain red flags that can increase your risk of an audit.
What are the most common red flags?
One is taking overly large tax deductions. This applies to such common deductions as charitable deductions and the home-office deduction.
Another potential red flag for an audit is not reporting all of your income. This can easily happen inadvertently if you have 1099s from multiple employers rather than one W-2.
Is it true that audit risk increases with income?
Generally yes. Overall, the IRS audits less than one percent (0.80) of all tax returns. But for taxpayers whose adjusted gross income (AGI) falls in the $200,000 to $500,000 range, the rate is 1.54 percent. And the rate is even higher for taxpayers with AGI of more than $1 million.
It should also be noted, however, that the chances of being audited for reporting no income are also higher than average for those who report no income. The audit rate for taxpayers in that category is 3.78 percent.
What about people who are self-employed?
Anyone whose tax returns include a Schedule C (Profit or Loss From a Business) faces audits at a higher rate than someone whose return does not.
This does not only involve business owners. It also includes others with freelance income. In practice, this means it’s important to be careful not to take excessive deductions for business expenses.