Getting audited by the IRS can be a stressful and worrying experience for many taxpayers. An audit means the IRS is going to closely examine and verify your tax return to ensure you reported your income, deductions, and credits accurately. If you made any mistakes or tried to cheat on your taxes, you could end up owing more money or even face penalties. So how do you know if you’re being audited? Here are some signs to watch out for.
You receive an audit letter from the IRS
The most straightforward way to know you’re being audited is if you receive a letter directly from the IRS stating they will be examining your tax return. There are several different types of audit letters you may get:
- CP75 Notice – You claimed the Earned Income Tax Credit
- CP2000 Notice – The IRS found a discrepancy between your return and information they have on file, such as investment income
- Letter 12C – Randomly selected for audit
The letter will provide instructions on what documentation you need to provide and by when. It’s critical not to ignore an audit letter, as that can lead to fines or IRS agents showing up at your door.
You’re contacted by an IRS agent
In some cases, the IRS may skip sending a letter and go directly to assigning an agent to your case. If so, the agent will reach out to inform you of the audit and request documents and information.
Types of audits conducted by in-person agents include:
- Field audit – An IRS agent will visit your home or business to conduct the audit
- Office audit – You will need to bring your tax documents to an IRS field office
Having a tax professional represent you can be extremely helpful if you’re facing an in-person audit.
Your tax transcripts show an audit
Another clue can be if you request copies of your tax transcripts from the IRS and see audit activity. The IRS keeps detailed records on all interactions related to your taxes, so transcripts will show if an audit has been initiated.
There are a few types of transcripts you can request:
- Tax Return Transcript – Shows most line items from your return
- Tax Account Transcript – Shows basic data such as return types, marital status, and payments
- Record of Account Transcript – Shows current account balance and past IRS activity
It’s the Record of Account transcript that will indicate any audits. You can request transcripts online or by mail if you want to check.
You claimed certain triggers for audit
While the IRS reports that they choose returns to audit completely at random, statistics show that returns with certain attributes are more likely to be audited. These audit triggers include:
| Audit Trigger | Reason |
|---|---|
| High income | Higher chance of errors |
| Unreported income | IRS data mismatch |
| Business losses | Verify legitimate |
| Rental real estate | Common errors |
| Itemized deductions | Need verification |
So if your tax return includes any of these attributes, your chances of audit may be higher than average.
You claimed confusing credits/deductions
Claiming very complicated or confusing tax breaks can also increase audit risk. These include:
- Earned Income Tax Credit
- Foreign tax credit
- Casualty loss deduction
- Alternative Minimum Tax
The IRS knows these are areas where taxpayers often make mistakes, whether intentionally or not. So taking vague or questionable deductions will prompt the IRS to take a closer look.
You fail to report all your income
One of the biggest red flags for the IRS is when your reported income doesn’t match up with the tax documents they receive from employers and financial institutions. Common unreported income sources include:
- Tip income
- Cash payments
- Online sales
- Rental income
- Investment income
The IRS receives copies of all W-2s and 1099 forms, so even small amounts of unreported income can trigger an audit. Be sure to disclose all your income to avoid this major flag.
You have offshore activity or foreign accounts
Due to increased IRS scrutiny on international activity, having any foreign financial ties can make you more likely to be audited. Offshore triggers include:
- Owning foreign financial accounts
- Foreign business investments
- Claiming the foreign tax credit
- Tax havens and low-tax jurisdictions
Make sure to follow all reporting requirements for foreign assets and income to minimize audit risk.
You’re in a “high risk” profession
Some occupations tend to have increased risk of audit for a few reasons. These include:
- Small business owners
- Self-employed workers
- Online sellers
- Construction workers
- Restaurants/bars
- Car dealerships
Jobs with lots of cash transactions or independent contractors are susceptible to unreported income, so the IRS pays close attention. Maintaining detailed records is essential.
You have a substantial increase in income
A major spike in your income from one year to the next can also raise suspicions. Especially if the change seems abnormal for your profession or situation. Types of income jumps that could trigger an audit include:
- Significant pay raise at your job
- Selling a major asset like your home or business
- Cashing out a large retirement account
- Winning the lottery
- Receiving a large inheritance
Being able to show documentation and a clear paper trail for sudden income shifts is important to avoid issues.
You have a history of past audits
Once you get audited once, your chances of being audited again in future years increases. Reasons for repeat audits include:
- Major red flag identified previously
- Continued suspicious return attributes
- Non-compliance or penalties issued before
For some taxpayers, it seems like they stay on the IRS watchlist indefinitely. Sticking to crystal clean returns is your best bet to get off audit radar.
You claim 100% business use of a vehicle
One of the most common audit triggers is writing off 100% of vehicle expenses as business use. Taxpayers often make the mistake of claiming all miles driven in a year were for business purposes. But the IRS expects to see at least some personal use as well.
Make sure to meticulously track mileage driven for work purposes and only claim that reasonable percentage to avoid extra scrutiny.
Conclusion
Finding out you’re being audited isn’t fun for anyone. But knowing the most likely triggers can help you avoid mistakes and red flags that catch the IRS attention. Double checking your return for accuracy and including thorough documentation can help lower your audit odds as well.
If you do receive that dreaded audit letter, stay calm. Just gather the requested documents and provide a clear explanation for any discrepancies. With an organized response and tax professional representation, you can get through the process smoothly.