IRS Audit Triggers: Avoid These 8 Tax Mistakes

If you are concerned about making tax mistakes, don't worry, we're here to help with your tax return. An audit doesn't always mean you've done something wrong; it might just mean the IRS wants to take a closer look at your return. We've listed the 8 main audit triggers and reasons the IRS might contact you, how to determine if there's an error, and what proof you need to avoid a full audit and penalties.

1. Reporting the Wrong Taxable Income

You can't lie on your federal income taxes because both you and the IRS receive Form W-2 and Form 1099 for all employment types, including full-time and self-employed work. It's essential to report all income accurately, without estimating or altering the amount you've made, even if you're a freelancer.

To ensure accuracy, compare your W-2 or 1099 to your records. If you think there's an error, contact the sender to issue a corrected form to the IRS. Always report all taxable income, even if you don't receive a specific document like a 1099.

2. Huge Donations with a Small Income

The IRS may flag your return if you're making large charitable donations despite having a modest income. It's acceptable if you made a significant contribution to a meaningful charity, then unexpectedly faced a job loss that lowered your income.

However, claiming fabricated charitable deductions or failing to document your donations isn't acceptable. To prove your large non-cash donation worth $5,000 or more, get it appraised, file Form 8283 for donations over $500, and retain all receipts and documentation to support your claim.

3. Pricey Dinners with Clients

Independent contractors can claim many deductions if expenses are ordinary and necessary for their work line. This includes meal expenses with potential or current clients. However, some misuse this, and the IRS notices.

If you entertain clients at a reasonable meal discussing business, deducting 100% (until 2022) of that cost is acceptable, scaling down to 50% in 2025. It's not okay to deduct extravagant meals with friends or family disguised as business expenses. Keep receipts detailing the expense's purpose and your relationship with the guests to substantiate your claims.

4. Personal Use of a Business Vehicle

If you run a side business, using your car for business activities is common. However, personal use must be accounted for. It's acceptable if the vehicle is strictly for delivering goods or services. For instance, a florist using their van to deliver flowers is legitimate.

It's unacceptable to use your business vehicle for personal errands and claim it as a business expense. Document mileage, destinations, and purposes carefully to separate personal and business use.

5. Your Home Office

The pandemic shifted many to remote work, but a home office deduction is mainly for independent contractors. Misinterpreting "home office" may provoke an audit. It's acceptable to claim deductions for a space exclusively used for work, housing necessary work tools, and not serving personal functions. Special deduction rules may apply to specific roles like Armed Forces reservists.

However, regular employees can't claim this deduction. As an independent contractor, file your taxes on Schedule C (Form 1040) to report income and expenses accurately.

6. Math Errors

Even minor tax errors like arithmetic mistakes, typos, or inconsistent entries can lead to audits. The IRS might correct them for you, which could lead to additional taxes, penalties, and interest. It's not okay to misclaim deductions, credits, or report incorrect income.

To prevent errors, double-check your entries, maintain accurate records, and consider electronic filing to minimize mistakes. Proper proof prevents the hassle of amended returns or corrections affecting your refund.

7. Estimating Expenses

Accurate record-keeping is vital for tax reporting. While rounding to the nearest dollar is acceptable, rounding to the nearest $25 isn't and could lead the IRS to question your reporting. Document deductions and credits accurately, ensuring they match receipts and records, and use actual numbers for form entries.

8. Mistaking a Hobby for a Business

Distinguishing between a hobby and a business affects tax treatment. The IRS considers it a business if it profits in three of the last five years; otherwise, you must establish a profit motive. Factors include business-like operations, expertise, time spent, income history, occasional profits, financial status, and personal enjoyment elements.

Properly report hobby income, even if non-profit driven, but it's not okay to conduct a full-time business, like running a flower shop, without declaring it. Maintain clear documentation, separate financial accounts, and records to substantiate business operations versus hobbies.