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Three common IRS audit triggers

On Behalf of | Feb 25, 2021 | Tax Law

Many people in Arkansas dread tax season as it approaches because they’re worried about IRS audits. Audits happen only .015% of the time according to statistics, but many people still fear them. The IRS flags returns suspected of fraud, so taxpayers should know what triggers the IRS.

Underreported or missing income

Sometimes, unreported income happens unintentionally, especially if a business pays the employee in only cash. However, all companies are supposed to report earnings to the IRS on the 1099 form, so the IRS will notice missing or underreported income.

The IRS compares the 1099 form to what the taxpayer reported, and the organization commonly sends a notice at the minimum. This can usually be corrected by filing an amended return following IRS instructions.

Earning $200,000 or more

The chance of an audit commonly increases the more money someone makes. In 2019, statistics show that the IRS only audited 1% of tax returns with reported income less than $200,000.

The reason relates to the complex forms that many high-earners have to use, increasing the chance of errors. The IRS has gotten criticism for focusing on low-income returns while not scrutinizing high earners, so higher incomes are on the IRS radar.

Taking unearned deductions and credits

The IRS allows certain deductions and credits to lower taxable income, and a taxpayer may mistakenly think they can take them. Deductions or credits that don’t match the normal range for the income reported commonly get flagged.

For example, someone who earns $20,000 a year and claims a $10,000 charitable donation or mortgage interest could raise a red flag with the IRS. Many people who work from home attempt to claim the home office deduction although they are ineligible. Another example includes a non-custodial parent claiming a dependent child whom the other parent claimed.

Dealing with audits is often confusing for many people because of tax laws. However, Arkansas residents may hire an attorney to help them settle the manner with the IRS.