- Excessive write-offs compared with income, unreported earnings and refundable tax credits are among the most common IRS red flags.
- However, you may avoid trouble by keeping detailed receipts and other tax paperwork readily available, experts say.
If you're among the millions of Americans scrambling to meet the tax deadline, it's critical to avoid errors that may flag your return or even trigger an IRS audit.
But with the tax agency still wading through a sizable backlog of returns, it's better to reduce contact by filing yours correctly and avoiding any mistakes that may invite scrutiny, experts say.
The IRS closed 452,515 individual audits during its fiscal 2020, about 0.29% of the roughly 157 million individual income tax returns filed, according to the agency.
"Some people play the audit lottery, meaning they'll do whatever they want and know that the chances of getting caught are slim," said John Apisa, a CPA and partner at PKF O'Connor Davies LLP. "That's not a good philosophy to have, though."
While there's typically a three-year statute of limitations for an IRS audit, with extensions in some cases, there's no time limit on how long the agency can pursue fraud or non-filers.
One of the first cues may be trying to claim too many credits or deductions compared with your income, tax experts say.
The IRS uses software with a numeric score for each return, with higher scores more likely to spark an audit, said certified financial planner David Silversmith, a CPA and senior manager of PKF O'Connor Davies in New York.
The system estimates the appropriate range for each deduction or credit by income level, and if write-offs are outside that range, scores may increase, he said.
For example, $90,000 of earnings with $60,000 in charitable deductions will alarm the system, said Apisa.
You're also likely to get flagged if the submitted tax forms don't match your reported income, triggering an automated notice, said Preeti Shah, a CFP and CPA at Enlight Financial in Hamilton, New Jersey.
Top red flags for an IRS audit
- Excessive write-offs compared with earnings
- Unreported income
- Refundable credits, such as the earned income tax credit
- Home office and auto deductions
- Rounded numbers
The IRS, for instance, may receive a report of your full-time wages on Form W-2, contract earnings on Form 1099-NEC or unemployment income on Form 1099-G. But you can avoid underreporting by double-checking forms with a free IRS transcript before filing.
Biggest red flags for write-offs
While advance child tax credit or stimulus payment errors are likely to get flagged this season, other write-offs tend to be perennial issues.
For example, the earned income tax credit, targeted at low- to middle-income families, is valuable because it's refundable, meaning you can still get a refund with zero taxes due, Silversmith said.
"If you claim the earned income tax credit while self-employed, that is a big red flag," he said. "You need to have receipts for income, not just deductions."
Self-employed filers need to be careful when claiming write-offs for a home office or a vehicle because those must be exclusively for business purposes, which may be more difficult to prove.
And you need to be precise when reporting credits and deductions.
"Round numbers are a tipoff that you're just making these numbers up," Shah said.
Save your receipts
"My best advice is that you're only as good as your receipts," said Apisa, because if the IRS wants evidence in two-and-a-half years, you'll need to have those readily available. And you'll want to keep records for seven years.
You don't have to be scared with the right paperwork to back up your returns, Shah added. If you receive notices and can provide proof, the IRS is generally "pretty reasonable."