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As millions of taxpayers file returns, many worry that certain claims could boost their chances of being picked for an IRS audit.
After an infusion of funding, the agency said it aimed to more than double the audit rate for the wealthiest taxpayers. But the IRS’ future priorities are unclear amid changing leadership and a Republican-controlled Congress and White House.
Still, some areas can be “low-hanging fruit for the IRS,” said Mark Baran, managing director at financial services firm CBIZ’s national tax office.
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Regardless of your income, you shouldn’t round numbers or estimate expenses on your return, Baran said.
“You’re really playing the audit lottery and increasing your risk,” he said.
Here are some other common IRS red flags for audit, according to some tax experts.
Underreported income
The IRS often finds missing income via so-called “information returns,” or tax forms, which employers and financial institutions send to taxpayers and the agency.
For example, these could include Form W-2 for wages, 1099-NEC for contract or gig economy work or 1099-B for investment earnings.
IRS software compares these tax forms to your return, and it can be “flagged for audit” when there’s a mismatch, explained Elizabeth Young, director of tax practice and ethics for the American Institute of Certified Public Accountants, or AICPA.
High deductions compared to earnings
Another area for IRS scrutiny can be high tax breaks compared to your income, Baran said.
The agency has a program that compares your return to others in a similar tax bracket, he said. The software uses an algorithm to determine whether your deductions are higher than average.
For example, if your charitable deduction is 30% to 50% of your adjusted gross income, that could prompt “another set of eyes,” Baran said.
Earned income tax credit
Another common target is the earned income tax credit, or EITC, a refundable tax break for low- to moderate-income workers, experts say.
“There are people who claim it improperly for one reason or another,” said Syracuse University law professor Robert Nassau, director of the school’s low-income tax clinic. “It can be confusing,” with eligibility based on earnings, residency and family size.
Higher earners are more likely to face an audit, but EITC claimants have a 5.5 times higher audit rate than the rest of U.S. filers, partly due to improper payments, according to the Bipartisan Policy Center.
‘Substantiation’ can protect from audits
While there are red flags, IRS audits are still relatively rare.
Through fiscal year 2023, the IRS examined 0.44% of individual returns filed for tax years 2013 through 2021, according to the latest IRS Data Book.
When audits involve “mistakes or innocent omissions,” they are typically conducted via so-called “correspondence audits,” which happen by mail, Baran said.
More than 77% of fiscal year 2023 audits occurred via correspondence, the IRS reported. The remaining were face-to-face “field” audits.
Either way, filers with “substantiation really should not fear,” said Baran, noting the importance of receipts and other records to support claims on your return.
“The IRS knows when somebody is prepared and they will move on,” he said.
