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3 factors that increase someone’s risk of an audit

On Behalf of | Nov 2, 2023 | IRS

Undergoing a tax audit is one of the most stressful “everyday” experiences a person could ever endure. Knowing that the Internal Revenue Service (IRS) takes issue with one’s tax return and that there are possible financial or criminal consequences possible is not an easy situation to navigate.

The IRS can recommend someone’s prosecution or demand penalties and fees for underpaid taxes. Audits may involve sending certain records to the IRS or even appearing in person for a sit-down discussion about finances. People have the right to bring an attorney to represent them during such interactions, but most people would prefer to avoid an audit whenever possible.

Some audits occur at random, but others are the result of the IRS screening tax returns for specific issues. Certain factors significantly increase the likelihood of an IRS audit. For example, the following elements might increase the scrutiny applied to someone’s tax return.

Claiming the Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a very valuable tax break available to working-class Americans. However, because of how valuable it is, there is concern about the possibility of fraudulent claims. Therefore, those who claim the EITC may be at elevated risk of an audit even though their overall income is modest.

Using business and self-employment deductions

Individuals who work as independent contractors and those who own small businesses often need to use write-offs and deductions to lower their federal income tax liability. As with the EITC, there is a risk of abuse associated with those write-offs and deductions. The IRS may look more carefully at someone’s tax return when they file as a self-employed individual or business owner.

Filing a return with mistakes or omissions

Some people realize a few weeks after filing their tax return that they forgot to include income from a part-time job that only lasted a month or revenue generated by a small investment. They can file paperwork to amend their tax return once they discover those errors. However, any circumstance in which the income and assets reported by businesses and financial institutions to the IRS do not align with what someone includes on their tax return may increase the likelihood of the IRS looking more closely at someone’s finances.

Even those who are fastidious about their tax returns can still end up facing an audit. Undergoing an audit does not automatically mean that someone will need to pay penalties nor that they will face prosecution. Yet, having legal guidance during the audit process can ultimately make a big difference for those worried about the possible consequences associated with an audit.