Four Tax Return Mistakes That Can Lead the IRS to Audit

Tax season is in full swing, and the Internal Revenue Service (IRS) has taken a closer look at how it distributes part of the nearly $80 billion in funding approved for the agency by Congress. How not to fall under the scrutiny of the IRS and avoid an audit, the publication said CNBC.

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Treasury chief Janet Yellen said the goals include improving the customer experience and improving technology. Critics warn that the new funding will spark a surge in IRS reviews.

“People are scared to death of the IRS,” said Karla Dennis, founder of Karla Dennis and Associates. “They don’t understand how the system works, and therefore they are very afraid of inspections.”

According to a recent report from the Syracuse University Transaction Clearinghouse, the IRS verified 3,8 out of every 1000 returns, or 0,38%, during fiscal year 2022, compared to 0,41% in 2021.

While IRS checks have been rare, experts say certain steps are more likely to trigger a check.

4 red flags for an IRS audit

The statute of limitations for an IRS audit is typically three years, starting from the time you file your return, explained John Apisa, accountant and partner at PKF O'Connor Davies LLP. But there is no time limit for the agency to investigate tax fraud.

Typically, the agency uses software to compare revenues and assign a score to each, with higher values ​​being more likely to trigger scrutiny.

1. Excessive loans or deductions compared to income

For example, your return might be flagged if you earned $100 and marked $000 in charitable contributions.

2. Missing income

Your income must reflect what employers and financial institutions have reported, such as Form 1099-NEC for contract employment or Form 1099-B for investment income. Take your time filing your return until you have all the documentation and check that the information you entered matches what is on the forms.

3. Repayable loans

The IRS also scrutinizes refundable tax credits more closely.

The number of checks has generally decreased for applicants claiming benefits for individuals with low and moderate incomes. This contributed to higher screening rates among black Americans.

4. Round numbers

Rounded expense deductions are surprising, says Preeti Shah, a Certified Financial Planner and Chartered Accountant at Enlight Financial in Hamilton, NJ.

"For example, if a business owner lists exactly $5000 for advertising, $3000 for legal fees, and $2000 for support, the IRS knows you're just cheating," she explained.

How to protect yourself from possible verification

While taxpayers may fear an audit, experts say the best defense is to keep receipts and records to provide evidence if needed.

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