The Most Common IRS Audit Triggers

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Staff Writer - Angela
October 30, 2018

No taxpayer wants to have to deal with an audit, but unfortunately, they do occur. Because facing an audit can be very time-consuming and stressful, it’s important to avoid this situation in whatever way you can. Many people don’t realize that there are several circumstances that can trigger an audit by the IRS, and understanding these situations will help you limit your chances of receiving an audit notice. Here are a few of the most common IRS audit triggers that you should be aware of if you want to prevent this frustrating situation.

Failing to Report Income

An IRS audit can be triggered in a variety of ways, but the most common reason you may face an audit is the failure to report all of your income. Fortunately, this is also the easiest audit trigger to avoid.

Most people that fail to report all their income aren’t doing so intentionally. For instance, if you work for multiple institutions, thus have multiple sources of income, you simply may have lost track of some of the money that you earned. Some sources of income that are easy to forget to report include:

  • Form 1099 income, which you would earn from contracting work.
  • Money in a brokerage account that you forgot you owned.
  • College savings account distributions.

Every tax form that you are sent will also be received by the IRS, and this includes distributed income. The IRS will compare the income listed on these forms to what you reported on your tax return, and if they don’t match, an audit will be initiated.

Money in Foreign Bank Accounts

Having foreign bank accounts can also result in an IRS audit. Under the Foreign Account Tax Compliance Act, there are very strict rules for reporting money stored in foreign accounts. First, the foreign banks must inform the IRS of any account holders who are also United States citizens. Second, taxpayers who own foreign assets worth $50,000 or more must report these assets on IRS Form 8938.

Previously, reporting foreign assets only required checking a box on your tax return. Now, there are three different steps to report foreign assets:

  1. Check the box.
  2. Identify the bank at which your account is held.
  3. State the highest amount held in the account during the previous year.

Transparency is the point of these new regulations. Unfortunately, these regulations also mean that taxpayers with foreign bank accounts are also much more at risk for an audit, both because it can be easy to make a mistake with these reporting requirements and because possession of a foreign bank account is often perceived as an attempt to hide money from the IRS.

Taking Too Many Business Deductions

Lowering their tax burden is a goal of most business owners. If you own a business, you will likely want to take advantage of as many available tax deductions as possible. While this is understandable, it also means that you’ll be increasing your chances of facing an audit.

If you take a large amount in business tax deductions, the IRS will examine your taxes very carefully. Imagine, for example, that you frequently need to travel for your business. The IRS keeps a list of different professions and their typical travel amounts. If you deduct 20 percent more travel time than is standard for your profession, then an audit and tax debt are likely.

Incorrectly deducting a business vehicle is another reason you might have to deal with an audit. For instance, if you take a vehicle home, it generally won’t be considered a business vehicle, even if you do use it for work. You should always list a business purpose when deducting a vehicle.

Failing to separate personal and business expenses may also result in an audit. Deducting business meals can often be tricky, particularly if you are deducting more than the norm for your profession. Take too many deductions for business meals, and an audit may very well be in your future.

Earning Beyond a Certain Threshold

The amount that you earn can also contribute to your likelihood of being audited. Typically, 1% of IRS audits are for taxpayers reporting less than $200,000 in earnings. If you earn above this threshold, your chances of being audited will increase. The more you earn, the more likely an audit becomes.

The reason that higher-earning individuals and businesses are more at risk for an audit is that their tax returns are more complicated than those who earn less. The IRS also wants to maximize the taxes that they collect, and auditing higher earners usually results in more taxes collected than auditing people and businesses that earn less money.

Dealing in Cash

In an increasingly digital world, cash transactions are becoming a thing of the past, which is why the IRS views large cash transactions as suspicious. Businesses must report large transactions to the IRS. Typically, these transactions are $10,000 or more. If you spend this much money in cash as an individual, you can expect an audit notice in your mailbox.

The reason that large cash transactions can result in an audit is that it can be difficult to determine the origin of this money. Imagine that you’ve been saving for a used car and take $10,000 out of your bank account to pay for the car. Then, you take this money to a dealership to purchase your car. Because of the previously mentioned reporting requirement, the dealership will notify the IRS of the transaction, and due to the amount, the agency will probably contact you for more information. In particular, they may request documentation of where and how the money was earned.

Operating a cash-only business is another common audit trigger. The IRS’s assumption is that cash-based businesses can more easily hide income since they may not document most transactions. The biggest red flag is if the deductions on your tax return reflect a lifestyle that doesn’t match the income you are reporting for your business.

The biggest fear of most people facing an IRS audit is that they’ll eventually need to pay back taxes. Fortunately, with the help of Solvable, you can deal with your tax debt quickly and easily. We’ve connected thousands of people with the best debt relief companies in the country, and we are here to do the same for you. To get started, read our debt relief company reviews or contact us with your questions.

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