5 Reasons the IRS Might Mistakenly Audit You, Finance Experts Say
Will you be getting a call from the tax agency over your return?
Getting your taxes together may not be the easiest thing to do every year, but it's undoubtedly one of the most important. Besides filing on time, it's also vital to avoid errors and not forget to include all of the necessary information. Fortunately, there are plenty of software options and services that can make the process somewhat more efficient—but even if you get everything right, you could still end up under investigation by the government if you're not careful. Read on to find out five reasons the IRS might mistakenly audit you.
You reported a lot of crypto transactions.
Whether it's dabbling in Bitcoin or going in heavily on Ethereum, cryptocurrency has become a popular addition to investment portfolios in recent years. The blockchain-based funds have even become easier to purchase thanks to new features on different apps, making the barrier to entry relatively low.
But as an emerging field in finance, crypto can also draw the attention of authorities when it comes time to file your taxes.
"Since this is such a new form of income and not yet up to reporting standards, the IRS is all over getting on top of cryptocurrency reporting," says Moira Corcoran, a certified public accountant and tax expert at JustAnswer.
This doesn't mean you need to abandon your wallet, though. If you've invested in cryptocurrency, it can help if you've hired an accountant with expertise in the area, Corcoran says.
You decided to file by paper.
There's no doubt that filing your taxes electronically comes with many benefits. Besides allowing you to use software, experts say it can also decrease the time it takes to get any possible refunds and get ahead of any issues much faster. Filing by paper can also create the kind of human error that triggers an audit.
According to Jon Gassman, a certified public accountant and financial adviser at Prager Metis, a past client had an issue when filing an amended return with printed forms due to its complexity.
"When the IRS key punched the return, they added an extra digit which resulted in a mismatch of income," he tells Best Life. "Since the audit was in-person, it was easily determined what the issue was when we shared and compared information. But regrettably, the IRS wanted to examine many other issues on the return."
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There's an error on your 1099.
Depending on the types of income you bring in each year, your filing might include different types of reporting forms. Freelancers are likely familiar with 1099s, which can be used to report wages or tips paid by a company to a contractor.
Juggling many of these forms can sometimes make filling out your forms a bit trickier. But even if you're careful inputting your own information, there could be an error on the side of the company that paid you.
"Did you get a 1099 that was incorrect? If so, it could lead to an audit even if you reported everything correctly," says Robert Farrington, founder and CEO of The College Investor. "The key here is the IRS might think you didn't and audit you as a result."
Because of this, it's always best to double-check your 1099s by matching them with received payments throughout the year. That way, you can bring up any issues before it's time to file, Farrington suggests.
You have a higher income.
Having a higher income can make many things in life easier. However, those who are raking in the money annually are also more likely to get flagged by the IRS for closer inspection.
"Anything over $400,000 a year puts you at higher risk for an audit," Corcoran says.
If you're concerned, consider hiring a team of expert accountants who understand your financial situation and can prime your filing to minimize issues, she suggests.
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You took too many deductions compared to others in your income bracket.
Any well-composed tax filing will include at least a few deductions. Of course, going overboard on write-offs is never good if you're looking to stay under the radar. And even if you're playing it safe, you can still end up getting audited depending on how much you make.
"The IRS compares your itemized deductions with taxpayers in the same income group," says Lei Han, PhD, certified public accountant and associate professor of accounting at Niagara University. "If your claimed deduction is much higher, then the IRS may flag your return."
Han tells Best Life this commonly comes down to claims for charitable contributions, home office expenses, meals, and entertainment expenses, among others.
"The taxpayers who claimed earned income tax credit (EITC) in recent years have been subject to a higher audit rate. For example, in the 2019 tax year, the audit rate for low-income taxpayers who claimed EITC was 0.77 percent," she shares.
Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.