The words “tax audit” fill many taxpayers with dread. The current audit rate is about 4 in 1000 tax returns, and although most of these are mail audits, some involve a deep in-person check conducted at the taxpayer’s home or place of business.
What makes the IRS focus on specific returns, and how can you lower the odds of an audit? Let’s examine the chief tax audit triggers in 2023.
1. A Significant Change in Income
If your income leaps or drops compared to the previous year, the change may trigger an IRS audit.
Of course, there’s a legitimate reason for most income shifts. Maybe you changed jobs or are self-employed with an income that fluctuates from year to year. But you must be able to produce records that explain your income change if the IRS audits your return.
2. Misreporting Taxable Income
Forms like 1099 and W-2 report investment income and earnings for self-employed individuals. IRS software may automatically correct your mistake if your tax return contains a typo (for example, you entered $18,000 instead of $81,000). But intentional-looking incorrectly reported income numbers are some of the strongest tax audit triggers in 2023.
To avoid an audit, ensure you receive every expected 1099 and W-2 form and check them against your records.
3. Too Many Round Numbers
Some entries on your tax return will be round numbers, like an expense of $1,000 or a freelance project that netted you $10,000. However, if your report consists entirely of neat, tidy numbers ending in 0 or 5, the IRS may suspect that you’re relying on estimates rather than actual records.
While it’s acceptable to round up cents (e.g., $59.6 to $60 or $36.4 to $36), the IRS won’t accept estimations.
4. Mixing Personal and Business Expenses
If you’re a business owner, separate your personal and business finances. This will make tax season easier and reduce your chance of triggering an audit while protecting you from major potential liabilities.
Run your business finances through separate bank accounts, credit cards, and third-party digital payment accounts, maintaining separate income and expense records for your business.
5. Too Many Donations
If you choose itemized deductions and report a high amount of cash donations, it may trigger a tax audit, especially if your income is moderate to low. The same is true for substantial noncash donations, like art and vehicles.
When you donate costly items to charity, we recommend getting a professional appraisal of the item and asking the charitable organization to provide a written acknowledgment of your donation.
Detailed Records Are Your Number 1 Defense Against Audits
While some audits are random, most occur because of one of the aforementioned tax audit triggers in 2023. Keeping your records and documentation in order is the best way to reduce the chance of an audit or resolve it quickly and efficiently when it happens.
Ensure you keep full and detailed reports of your income and any deductions you claim as tax credits, like office deductions, business expenses, or charitable donations. If the IRS still selects your return for an audit, we recommend consulting a tax professional.
Levy & Associates, Inc. – Get Help With Resolving Tax Audits and Other Tax-related Matters
Even if you do your best to avoid tax audit triggers in 2023, the IRS may still choose to run an audit on your tax return. If you’re facing an audit or other tax issues like penalties or liens, call us at Levy & Associates. Our team of qualified CPAs, tax attorneys, and former IRS agents will help you resolve any tax problem.
Call 800.TAX.LEVY or contact us online to schedule a consultation with a tax specialist.