These Typical Tax Errors Could Lead to an IRS Audit in 2024. This is What Not to Do.

The IRS stated that it is increasing manpower and technology for the 2024 tax season in an effort to “reverse the historic low audit rates” for high-income taxpayers. Many people already find filing season to be a stressful time due to the difficulty of sorting through several forms and gathering accurate information. The stress of tax season may increase due to the possibility of an audit.

A simple examination of your accounts is all that an audit entails, according to the IRS, “to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”

Your odds of being audited are still quite low, even if you’re not one of the “high-income, high-wealth individuals” the IRS is focusing on this year: Less than 0.4%, or about 626,204, of the over 165 million returns that the IRS received in 2022 underwent an audit.

Although a federal tax return review can happen at any time, some actions are more likely to raise red flags than others. The IRS claims that a “statistical formula” that contrasts your returns with those of other taxpayers determines whether or not to audit you.

Here are some typical errors that prompt the IRS to investigate further, along with suggestions for avoiding them.

1. You work for yourself and fail to properly report deductions

You should feel empowered to take legitimate business expenses if you work for yourself. Just be sure you have supporting documents and receipts.

The home office deduction cannot be claimed for a place that is utilized for dining room tables; rather, it must be a dedicated location used on a regular basis for your trade or business.

You must keep track of the miles you drive for work if you plan to claim transportation expenditures. It will raise suspicions if you write off the full cost of your personal car as a business expense.

It’s especially important to be thorough when writing off business meals. Business lunch deductions were allowed to be 100% deductible in 2021 and 2022, but they are now limited to 50% again.

However, you need to record details like who you are with, why you met, when you had dinner, and so forth. Keep your receipts, of course.

2. Your philanthropic deductions are excessive.

You can deduct monetary contributions to approved organizations, as well as the value of donated clothing, appliances, and other items, if you itemize your deductions. If these donations appear excessive given your income, the IRS notifies you.

The Discriminant Information Function system, an agency computer program, constantly examines returns for these kinds of irregularities.

They’d pay attention if you claimed a charitable deduction equal to, say, half of your income.

The amount of your adjusted gross income that can be deducted for charitable contributions is capped by the IRS. Certain types of gifts may surpass this cap, but you’ll probably come under investigation if you do, so be sure all your documentation is in place.

3. You overstate your losses or business expenses.

If you receive income from a business, you must submit a Schedule C form; however, doing so adds complexity to your tax return and may increase the likelihood that you will receive a call from the IRS.

Take advantage of every deduction to which they are legally entitled, but to be very careful in providing specifics and supporting documentation to back their claims.

Generally speaking, the IRS algorithm searches for deductions that deviate from what is typical for individuals in your field: A closer look may result if, as a patent attorney, your travel charges are three times higher than those of your competitors.

The IRS may seek to confirm that your business is legitimate if you have experienced losses for a number of years in a row.

Small business owners with careless recordkeeping frequently claim unnecessary deductions.

Expenses and deductions made up by the firm owner usually stand out. The IRS will need documentation of all deductions made during an audit; if this is not done, the deductions will not be permitted.
Companies that attempt to claim credits and incentives for which they are ineligible should raise suspicions.

4. You entered incorrect data or made a math error.

Simple math mistakes won’t normally result in an extensive IRS investigation, but they will draw more attention and cause your return to process more slowly. Errors such as mistyping your Social Security number, switching the numbers on your address, and other careless mistakes can also occur.

By importing your W-2s or 1099s straight into the system and retrieving a tonne of data from prior years, filing electronically reduces the likelihood of these errors.

Hiring a professional tax preparer is an additional effective safeguard against errors and incorrect calculations.

5. You make money that you haven’t disclosed.

The main one is this: Employers must provide a W-2 to the IRS detailing your profits, or a 1099 in the case of independent contractors and freelancers making more than $600.

The IRS automatically verifies that the income you report and the amount your supervisor supplied match. In addition, it receives notifications of interest or profits from stock transactions, investments, savings accounts, big gambling wins, inheritances, and nearly any other source of income.

An audit may be initiated if you do not record capital gains on bitcoin trades.

6. Your return is not complete.

While there isn’t a one factor that always initiates an audit, the most frequent cause of IRS correspondence is inconsistencies in the supporting documents.

It can be as easy as a form missing, and folks who hustle at the last minute are frequently the ones who experience it.

Numerous credits are available from the federal government, such as the child tax credit, which enables parents to claim up to $2,000 for each eligible kid.

You must provide proof that you are eligible for these benefits.

You will receive a notice from the IRS if you filed for no child tax credit the previous year and you filed for three children who are not infants this year.

That doesn’t always imply that you are lying to the government or that you have made a mistake. It’s possible that you gave birth in May 2023, and the IRS is still processing your 2022 tax return.

Additional Tax Guidance

Even in cash-based industries like waitressing or babysitting, unclaimed money might still catch up to you.

You can be sure that the person sending their child to you for care is deducting your services from their taxes. Thus, you must ensure that everything lines up. Bonding is a must for any business, even a small one like painting houses. That will come across the IRS’s desk someday.

Government agencies communicate with each other. It will raise an eyebrow if you declare $20,000 in income on your tax return but put down $80,000 when you apply for a Federal Housing Administration-backed house loan.

In addition to underreporting, small business owners with poor record-keeping practices pose a significant audit risk.

When it comes time to pay taxes, the business owner usually estimates because they haven’t kept track of their income for the entire year. The issue with this strategy arises from the fact that the IRS has received Form 1099s reporting the majority of earned income. The income shown on Form 1099s and the owner’s return might be compared by the IRS.

A disgruntled employee or an irate coworker may be only too happy to denounce you for tax fraud because the IRS takes tips from concerned individuals. This is especially true since the agency’s 2006 Whistleblower Program enhanced rewards to possibly between 15% and 30% of the proceeds that the IRS collects.