Top IRS Audit Triggers for 2021

irs audit triggers

Tax is the most important source of government funds for it to lead its people, provide for their needs, make them safe, and help them grow and prosper. It’s the reason why the country is able to create different projects in education, health, roads and highways, infrastructure, safety and protection, and address inequality and poverty. 

That’s why paying taxes is a legal obligation and civic duty of all citizens in the United States. However, if you don’t want to settle your tax liability, you’ll surely face different consequences and penalties. Unless you can present documents and other factual evidence that you’re not capable of paying your taxes, the IRS may give you necessary tax deductions and credits and even help you join a particular program that will significantly help you pay your return. 

Moreover, most taxpayers are facing one of the common problems right now when the IRS is auditing them. Even though you already filed your return, you still have a chance of getting audited. However, if that happens, you’ll receive a letter from the agency with all of the information you need to do and all the necessary forms and documents that you need to file. Hence, if you want to know about the big reasons for being audited by the agency, read the top audit triggers for 2021 below.

What Will Trigger an IRS Audit?

When you’re ready to file your returns, you might get worried about doing something wrong that might trigger the IRS to conduct a tax audit. However, if you receive a notice that you’re being audited, it doesn’t necessarily mean that there’s a problem. In fact, the selection for taxpayers to be audited is through a system algorithm. The IRS uses a particular statistical formula to choose an individual and compare the return with others’ to see the differences and similarities.

Besides that, the other selection process chooses a particular filed return with an existing issue with other taxpayers. Besides that, if someone has reported to the IRS that you didn’t comply with the tax laws, it’s another reason that will trigger the agency to conduct a tax audit on your account. To know more about it, you can check the list of the top 10 IRS tax audit triggers in the next item. 

There are also priority areas that the IRS might identify a need to increase compliance. In recent years, these areas have included Trust Fund Recovery Penalties (TFRPs) and failing to report crypto tax gains. These types of audits can quickly turn into criminal tax investigations.

Top 10 IRS Tax Audit Triggers

Here are some big reasons that will trigger the IRS to audit a particular taxpayer. 

  • Typographical and Calculation Errors

It includes miscalculation of your taxes, misspelled pieces of information, and incorrect numbers. 

  • Inconsistency of Your Information 

When you file your return, it doesn’t coincide with the information you have on the IRS system.  

  • Too Much Tax Adjustments and Credits

Some taxpayers may receive more itemized deductions and earned income tax credit than others. However, too much of the tax deductions may also get the attention of the IRS to review your return further. 

  • Foreign Bank Accounts

If you are a resident alien in the United States, you are required to file your return both of your onshore and offshore profits and assets.  

  • A Business Claiming Losses Every Year

Owning and running a business that doesn’t earn any profit all the time will catch the IRS’s attention and may result in conducting an IRS audit. 

  • Asserting that Your Vehicle is for 100% Business Use

It’s when you claim that you only use your vehicle for your business all the time.

  • Running a Business With a Lot of Cash

Some cash-business owners may not declare all of their profits in cash to the IRS. 

  • A Sudden Big Change in Your Expenses and Income

It’s when your income and expenses in the current tax year show a big difference compared to previous years. 

  • Businesses With Unusual Large Expenses

If you have a business with larger expenses than others that offer the same products or services, that particular situation will usually catch the attention of the IRS.

  • Earning So Much Money

Taxpayers who earned 1 million dollars last year and make a profit of 4 million dollars this year are more likely to get audited by the IRS. As you can see, IRS audit triggers can vary widely.

Typographical and Calculation Errors

what triggers an irs audit
Calculation errors are among the most common IRS audit triggers.

The IRS is using a computer system and program that will detect any inaccuracies and math errors. If the total income tax you’ve reported doesn’t have the correct value, your name and address contain typo errors, and even the Social Security numbers you’ve provided lack one number or two, your return will be subject to reassessment and further review. 

That’s why one thing you need to remember is to always double-check every piece of information you put on the IRS system to ensure that everything is accurate. The same thing goes for all forms and documents you provide when filing your return. 

Inconsistency of Your Information 

When you process your return, you need to file your 1099s and W-2s. Then, the computer system that the IRS is using will run a quick review of your account to check for any inconsistency and inaccuracy of your information. If it detects any discrepancy, your return will be subject to further review and even reassessment. 

Besides that, if ever you receive 1099 in error, or you think that it doesn’t belong to you, don’t just disregard it. Instead, you have to get in touch with the issuer or the third party who issued 1099 to rectify any mistake. Otherwise, it may trigger the IRS to conduct a tax audit on your return. 

Too Much Tax Adjustments and Credits

Taxpayers may get an earned income tax credit and deductions when they qualify for the particular guidelines set by the IRS. However, the agency will check every tax deduction you receive and compare them with others who also have the same tax benefits. If they find out that you’re receiving more than the others or are getting more now than the previous years, the chance is high that it’ll attract the attention of the IRS to check your account further. 

There’s nothing wrong when you get more itemized deductions and additional tax credits. It may include your charitable deductions, adjustment for being a working mom, and many others. Just make sure that everything is valid, and you can substantiate your credibility to get those tax benefits with documents and other factual evidence.

Foreign Bank Accounts

If you’re an alien in the United States and you’ve qualified for the Substantial Presence Test, it makes you a resident alien in the country. It means that you won’t only be reporting all the income you’re earning in the US, but you also have to include all your profits, assets, and properties you have offshore. That includes the money you’ve deposited in your bank account from other countries. 

The account containing more than $10,000 must be reported to FinCEN, but those with more than $50,000 will be reported to the IRS on another form. In most cases, the IRS tends to conduct a tax audit on these taxpayers because they’re interested in searching for cases of tax evasion in those offshore bank accounts. 

A Business Claiming Losses Every Year

If you own and run a big or small business, but you always report to the IRS that you’re not earning at all, it’s also another big reason that the agency could trigger a tax audit. Even though it’s true that you have more expenses than the business income you’re earning, if it happens all the time, it looks like you’re only doing business to lose money, or you’re hiding your unreported income to minimize your tax obligations. That’s why you have to make sure to present supporting documents to prove your tax situation, or else you may be dealing with another problem of tax evasion.   

Asserting that Your Vehicle is for 100% Business Use

When you’ve included your vehicle in your tax return as a mode of transport for the purpose of using it for your business, the IRS may get interested in conducting a tax audit. It’s because it may be impossible for anyone to use a car for business twenty-four hours a day and seven days a week. It may be fine if the agency only checks your vehicle, but what if they will further review everything in your tax return. 

You’ll be lucky if they’ll find nothing from it. Otherwise, you’ll surely face another set of consequences and possible penalties if you’re proven guilty of not complying with the tax laws. That’s why you have to state facts all the time with proper documentation to support your claim the next time you file your tax return. 

Running a Business With a Lot of Cash

If you own and run a business and you usually have cash transactions with your customers, the IRS will more likely conduct a tax audit on your return. It’s because these cash-business owners tend to get tempted not to include all of their unreported income when they file their tax returns. These businesses may include restaurants, bars, convenience stores, salons and spas, car washes, and many others. 

A Sudden Big Change in Your Expenses and Income

One of the big reasons that may trigger the IRS to conduct a tax audit is when your return in the current year shows a big difference from previous years. For example, if you filed your tax returns last year with your high income reaching 1 million dollars, but the one you’ve submitted this year is around $200,000 only, the IRS may get interested in knowing what happened to your finances by doing a thorough review of your tax returns. It may happen, though, but the IRS still needs to check all of the documents and factual evidence you’ve presented to validate your claim. That’s why you have to make sure to keep all of the records to prove your total income and expenses this year. 

Businesses With Unusual Large Expenses

There’s nothing wrong with owning and running a business. However, the filed returns of some taxpayers show unusually big expenses on their businesses than the others. As a result, the IRS will be interested in conducting a thorough review of these tax returns and comparing it with others of the business type and income range. However, if it’s what truly happens to your business, you have to make sure to provide all documents and other evidence to prove that all of those expenses are true. If so, you don’t have to worry about it, and you’ll be safe after the IRS conducts tax audits of your returns. 

Earning So Much Money

The IRS will be more likely to conduct a tax audit on taxpayers who reported a much increase in their income compared to what they’ve earned in the previous years. For example, the total taxable income you included in your tax returns last year was only around $300,000. However, you filed your tax return this year, and it was almost two million dollars of your high income. The IRS will be curious about what happened in your finances and check a thorough review of your account. As long as you reported the amount correctly and submitted all necessary forms and documents, you have nothing to worry about.   

FAQs

What are the chances of being audited?

There are various reasons that a taxpayer can be audited. The IRS is using a statistical formula to select a particular individual for a tax audit. If you also have an existing issue with other taxpayers, your chance is high that you’ll be selected. Besides that, if someone has reported you to the IRS for not complying with the tax law, the agency will also make your account subject to a tax audit. 

How does the IRS decide who gets audited?

There are many big reasons that the IRS will have tax audits of different returns. If they find some discrepancy between the tax returns you filed and the information you have on file, the IRS will decide to conduct a further review of your account. Besides that, if there are also sudden big changes in your tax returns, like a significant increase or decrease in your income tax, you’ll surely get the attention from the IRS. Hence, the IRS will decide who to audit depending on the existing circumstances and your tax situation. 

Who does the IRS audit the most?

The IRS will consider some factors before they decide on auditing a particular taxpayer’s return. However, in most cases, there are some returns that tend to get more attention from the agency, including those with the largest and smallest taxable income tax, sudden big increase or decrease compared with the previous years, miscalculations, and typo errors, and many others. If your return has one of these, you’re more likely to get audited. 

Does the IRS look at every tax return?

Yes, the IRS wants to make sure that all of the returns and documents are correct. It’s their job to ensure that every taxpayer complies with the tax law and files their returns on time. Hence, the IRS knows that it’s always necessary to check every tax return carefully. If they find some discrepancy from the return you filed and the information you have on file, the IRS knows well what decision to make whether to conduct a further review of your account or not.

What increases your chances of being audited?

The chance of you getting audited will increase if the IRS will find out some discrepancy between the return you filed and the information you have on their system. In most cases, some of the IRS audit triggers include those returns with sudden big decreases or increases compared with the returns filed in the previous years, miscalculations and typo errors, the largest and smallest taxable income tax, and many others. If the return you’ve filed has one of these, you’re more likely to get audited. 

What do IRS auditors look for?

The IRS auditors will look for your documents and other factual evidence that will prove either you’re telling the truth or you’re hiding something from the agency. However, if you trigger an audit, it doesn’t necessarily mean that there’s a problem. You only have to coordinate with them so that they can get all of the information they need. Just make sure to keep all of your records to support whatever information you’ve included in your return.  

Can the IRS audit whoever they want?

Yes, the IRS can do tax audits for whoever they want. However, they also have rules or guidelines that they need to follow when it comes to tax auditing. They’re using a particular computer algorithm in selecting a taxpayer, which is random so that they won’t know who to audit. However, if the IRS will find any inconsistency and inaccuracy in the information and other details in your return, the chance is high that you’ll get audited. Remember that the IRS will never intentionally tax audits for your return unless you give them a reason to do so. And don’t forget that the IRS generally has at least three years to audit your return (longer in certain cases).

Conclusion

If the IRS sent you an email or mail telling you to explain a particular part of your tax return because you’re being audited, as mentioned earlier, don’t worry because it doesn’t necessarily mean that there’s a problem. All you need to do is reply to their messages and answer all of their questions as quickly as possible. Besides that, you can also find help from personal finance or a tax professional whenever necessary. The best way to get these things resolved is to provide all your documents and evidence to prove all your claims and support whatever information you included in your return.

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