BATS Xpress, LLC

Tax season is a time of year that can bring about a mix of emotions for many of us. While some anticipate a possible tax refund, others may feel anxiety about the accuracy of their tax returns. The mere thought of an IRS audit is enough to cause unease. However, understanding and avoiding common mistakes that can trigger an audit can help you navigate tax season more confidently.

Inaccurate Reporting of Income

One of the most common triggers for an IRS audit is the failure to accurately report all income. This includes wages, dividends, interest, and earnings from freelancing or gig economy work. The IRS receives copies of all your 1099s and W-2 forms, and discrepancies between these documents and your tax return are red flags that could lead to an audit.

Excessive Deductions

While deductions are a legitimate way to reduce taxable income, claiming excessive deductions that are disproportionate to your income level can attract unwanted attention from the IRS. This is particularly true for deductions like charitable contributions, business expenses, and home office deductions if they seem unusually high for your income bracket.

High Charitable Contributions

Charitable giving is commendable, but significantly high contributions in relation to your income can be a trigger for an audit. Ensure you keep all documentation for charitable contributions, including receipts and letters of acknowledgment from the charity, especially for donations over $250.

Claiming 100% Business Use of a Vehicle

Claiming that a vehicle is used 100% for business purposes is a red flag for the IRS, especially if you don't have another vehicle for personal use. Be realistic and accurate in calculating the percentage of business use and keep detailed mileage logs to support your claims.

Home Office Deduction

The home office deduction is legitimate for many freelancers and remote workers, but it must meet specific criteria. The space must be used regularly and exclusively for business purposes. Misunderstanding these rules and claiming this deduction inappropriately can trigger scrutiny.

Failing to Report Foreign Bank Accounts

The IRS has intensified efforts to uncover unreported foreign accounts. Failing to report a foreign bank account can lead to severe penalties and an audit. If you have foreign assets, be sure to understand your reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR).

Rental Losses

Real estate rental losses are subject to "passive activity loss" rules, but there are exceptions for "real estate professionals." Misinterpreting these rules and incorrectly reporting rental losses can lead to an audit. Ensure you meet the specific criteria before claiming such losses.

Round Numbers

While it might be tempting to round up expenses or income to simplify your tax return, consistently rounded numbers can appear suspicious. Always report exact amounts to avoid giving the impression of estimating or inflating figures.

Filing a Late or Amended Return

Filing your tax return late or submitting an amended return can increase your chances of an audit. This doesn’t mean you shouldn’t correct a mistake if you find one; however, be aware that doing so could raise a flag. Ensure accuracy to the best of your ability the first time around.

Math Errors

Simple math errors can also lead to IRS scrutiny. The IRS may wonder if careless mistakes in arithmetic extend to more significant inaccuracies on your return. Double-check your numbers or use tax preparation software to reduce the risk of errors.

High Income

Statistically, individuals with higher incomes are more likely to be audited. While you can't change your income level to avoid an audit, ensuring meticulous documentation and accuracy in your tax return is even more critical if you have a higher income.

Not Reporting Cryptocurrency Transactions

With the increasing popularity of cryptocurrency, the IRS is paying close attention to transactions involving digital currencies. Failure to report income from cryptocurrency transactions, including capital gains, can trigger an audit.

Conclusion

The key to avoiding an IRS audit is thoroughness, honesty, and accuracy in your tax filings. Ensure that all income is reported, deductions are legitimate and well-documented, and that your return is free from errors. While the prospect of an audit can be daunting, understanding these common triggers and how to avoid them can help you navigate tax season with confidence.

Remember, when in doubt, consulting with a tax professional can provide personalized advice and peace of mind. Call our BATS Xpress team if you need assistance with your situation.