Receiving a notice from the Internal Revenue Service (IRS) about an audit can make you feel nervous.
Although audit chances are relatively low, understanding the common reasons for an audit helps you take steps to reduce your risk and ensure your tax returns are accurate and compliant.
Discrepancies in reported income
The IRS might conduct an audit due to discrepancies between the income reported on your tax return and the income your employer or other income sources report. The IRS gets copies of W-2s and 1099s and cross-references these documents with the income reported on individual tax returns. If significant discrepancies exist, the IRS may initiate an audit to verify the accuracy of the reported income.
Unusually high deductions or credits
Claiming deductions or credits significantly higher than the norm for your income level or occupation is another common reason for an audit. The IRS routinely analyzes taxpayer data to identify patterns and trends. If your deductions or credits deviate significantly from what is typical, the IRS may investigate further to ensure the claims are legitimate.
Sometimes, the IRS selects tax returns for audit randomly. Although you cannot avoid having the IRS choose you by chance, ensuring your tax return is accurate and complete helps minimize any potential issues during an audit.
Tips for reducing the risk of an audit
You cannot guarantee you will never receive an audit, but you can take steps to reduce your risk and ensure a smooth process if selected for an audit.
- Keep detailed records: Maintain accurate records of your income, expenses, and other financial transactions. These records prove invaluable during an audit.
- Report all income: Report all income sources on your tax return, including freelance work, side gigs and any interest or dividends earned.
- Be cautious with deductions and credits: Claim only deductions and credits for which you are eligible and have the necessary documentation to support.
By understanding the common reasons for an IRS audit and taking steps to reduce your risk, you help ensure your tax returns are accurate and compliant, minimizing potential issues during an audit.