Why did I get Audited by the IRS?
Most of us are aware that certain income tax issues are more likely to result in an IRS audit than others, so what are they? It’s not common knowledge that the IRS can audit you for any reason, but there are commonalities that we typically see.
Common Groups That Typically Get Audited by the IRS
An IRS audit is much more probable with certain groups of businesses than others. You’re most likely to get an audit if you or your business falls into one of these categories:
- High-income earners who also have Schedule C: When you start earning higher business income, the IRS is mostly likely to visit you for an audit, especially if you have a Schedule C. Schedule C is a supplemental schedule to your Form 1040 that reports income and expenses from sole proprietorships and single-member Limited Liability Companies.
- People who do freelance service work: If you do freelance work, including through the sharing community (think of Uber, Rover and Grubhub), you’re likely to be audited. If the numbers are outside of what is considered normal, the computers will pick them up.
- High-income non-filers: This group comprises high-income earners who don’t file required tax returns. A 2024 initiative focused on over 125,000 cases of unfiled returns between 2017 and 2021.
- Individuals who fail to report all taxable income: When IRS computers cross-check 1099s and W-2s and find underlying income reports, they’re likely to visit you for an audit.
What Will Get Me Targeted by the IRS?
All accounting information included or excluded on your tax report could be a trigger for a visit by the IRS. The most common business actions that would quickly send them your way include the following.
Inconsistent Averages
Everything on returns is compared to averages, and any outliers will be targeted. Large losses on both individual and business returns will be flagged. If you’re a going concern and have enormous losses, they want to know how you support yourself or how you plan to stay in business.
Disproportionately Large Charity Donations
Speaking of averages, the IRS knows the average charitable donation for folks at your income level. So, if your charitable deductions are disproportionately large compared with your income, it raises a red flag. Don’t forget to get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger target.
And if you’ve donated a conservation or façade easement to a charity, chances are good that you’ll hear from the IRS. Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.
Missing Information
Missing information is another high-trigger item. The IRS matches every third-party reporting item to your return. This includes:
- Interest income
- Dividend income
- Gambling winnings
- Independent contractor income
- W-2 income
These are all issued to the IRS, so if you fail to include those figures on your return, you will be recognized.
Worker Misclassification
The IRS also targets independent contractors to determine whether they’re really contractors or employees. Worker misclassification is an important issue for the IRS and various state taxing authorities because many employers are perceived as not properly classifying their workers. By avoiding labeling their workers as employees, employers can avoid paying payroll taxes, minimum wages, overtime, health and retirement benefits and paid leave.
The IRS wants to ensure that traditional IRA owners and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax.
The IRS knows that a significant number of filers make errors on their income tax returns regarding retirement payouts. Most of the mistakes come from taxpayers who didn’t qualify for an exception to the 10% additional tax on early distributions. So, the IRS will be looking at this issue closely.
The IRS has a chart listing withdrawals taken before the age of 59½ that escape the 10% penalty, such as payouts made to cover very high medical costs, total and permanent disability of the account owner, or a series of substantially equal payments that run for five years or until age 59½, whichever is later
Filing Claim on an Amended Return
Filing a large claim for a refund on an amended return will almost always cause an audit. If the original return failed to include an item of income, you will want to correct it on an amended return. However, filing an amended return that claims credits that you didn’t claim on the first return will open up the whole return to scrutiny, so you end up being audited on other things not originally at issue.
This is particularly true where the amended return raises new issues. For example, a return might be amended to claim R&D credits that weren’t on the original return. The IRS will likely audit for that particular issue but will open up the entire return for questioning.
Taking Steps Forward
So, what do you do if you’ve been flagged for an audit? We always recommend discussing this with a CPA. Some audits are extremely minor, where they may just ask you to pay tax on that 1099 you forgot, and some are more serious.
Always know that this is not a personal attack on you and may require some extra explanation. This is why it’s always important to keep your tax return supporting records for at least 3 years from the date you filed your original return or 2 years from the date you paid the tax (whichever is later).
Get Professional Help from Marshall Jones for Accurate Accounting
The IRS targets individuals with inaccurate accounting procedures, which may range from issues with claims on amended returns to a lack of knowledge to report appropriate taxable income. With full-service accounting, you can streamline your books and resolve most of the questionable reports that could put you on the ladder of an IRS audit.
At Marshall Jones, we can help you get back on track with your accounting and avoid audits. Whether you’re in the nonprofit space or the construction and real estate industry, we can help you with a wide range of full-time accounting services, including bookkeeping and 401(k) audits. Contact Marshall Jones today to get started.
