15 Factors That Can Land You in a Tax Audit

The words "tax audit" will strike fear in many taxpayer's hearts. If you're audited, it can be stressful and scary, but as you'll learn by the end of this report, most end up easily resolved. And better still, there are various things you can to do avoid being audited. Here are 15 things, for example, that can make it more likely that you'll be audited. You may not be able to avoid them all, but you can certainly avoid some of them.

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Here's an easy problem to avoid: Make sure your return is clear and easy to read. It will automatically be so if you're using tax-prep software to get your taxes done, and if you use a professional preparer, he or she is unlikely to turn in a messy return, too. If you're going old school, though, and preparing your return by hand, be sure to write legibly. Illegible scrawls may draw agents' attention and spark an audit -- if only to ascertain what you meant to write.

Tax audits aside, it's very important to keep good records and any needed receipts throughout the year, so that preparing your tax return will be an easier chore -- and also so that your return will be as complete as possible. Bad record keeping could lead to some deductions going unclaimed, for example. And if you are audited, with the IRS questioning some deductions you should have receipts for… well, you'd better have those receipts.

An incomplete return also stands a decent chance of being audited, because if some spaces or sections that should be completed are blank, it can mean that your taxes or refund owed was not calculated correctly.

ALSO READ: Getting a Tax Refund in 2022? Why That's a Big Mistake and How to Fix It

A key reason why many tax returns are audited is simply because they raised some questions that needed answers. That could be due to illegible handwriting, but it could also be a deduction you took that was unclear, or numbers that didn't add up, or numbers that just looked questionable. If you're filing your return manually, via paper, you may be able to include a sheet explaining anything that needs explaining, but it might not get read. If you're e-filing, it may be difficult to include attachments. Overall, as you prepare your return, just try to be clear about everything, and not leave anything looking questionable.

It's best to file your return on time -- time and time again. That can show the IRS that you've been "compliant" for a long time and suggests you take taxes seriously. Even worse than not filing on time is not filing at all. Imagine, for example, that you've not filed a tax return for several years. If you suddenly file one after that, especially if you have significant income to report, that could raise questions at the IRS. For best results, follow the rules and file your return every year, on time. Even if you have little or no income, and owe no tax, by filing you may end up with a refund!

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A big no-no in the eyes of the IRS is when you omit income on your tax return. You may not think the IRS knows about that side job you have, but the job might have sent the IRS an earning report for it, and the IRS will be expecting you to be reporting it. Think of all those 1099 forms you receive from brokerages and other businesses. Typically, that information has also been sent to the IRS. Did you win some money at a casino? The casino may have reported that -- and, regardless, you're expected to report gambling winnings as income.

ALSO READ: When Can I Expect My Tax Refund?

Most of us have most or all of our taxes taken out of our paycheck automatically each pay period. That may seem annoying, but it means you don't have to cough up large sums to Uncle Sam come April. Those who don't have taxes withheld, though, such as self-employed folks, should be filing quarterly estimated tax payments -- in a good faith effort to have most of their taxes due paid throughout the year. Fail to do so, and the IRS may question you -- via an audit.

If you suffer a capital loss, such as from stocks sold at a loss or perhaps even a home sold at a loss, you can often deduct some or all of the loss on your tax return -- and you should. With capital gains from stocks, you can offset capital gains with capital losses. The IRS might take notice, though, if you have outsize losses -- and, especially, if you repeatedly claim losses. The IRS might question what's going on. If you've simply been unlucky, you'll just have to demonstrate that.

ALSO READ: Capital Gains Tax on Stocks: What You Need to Know

Deductions can also lead to an audit, if they're questionable in any way. The IRS knows how much people in each income category tend to claim in deductions for various categories. So if you claim an unusually large deduction for someone like you, it might question that. (Again, if you can back it up with receipts or some other kind of acceptable substantiation, the auditor can be satisfied.) If you earn, say, $50,000 and have donated $20,000 to charity, that might draw some attention. If you're claiming a home office deduction that seems too large, or if it seems like you might not qualify for one in the first place, that's another questionable deduction.

ALSO READ: Should You Itemize Your Taxes? Here's How to Know

Having an income significantly above or below average won't necessarily cause you to be audited, but know that those with very high or very low incomes tend to be audited more often. In 2020, IRS Deputy Commissioner Sunita Lough noted:

"Taxpayers … with incomes above $1 million … had higher exam rates than all other groups earning less. Tax Year 2015 provides a good historical overview of where IRS compliance priorities are focused. The exam coverage rate of taxpayers with incomes of $10 million or more is 8.16%. The rate for those between $1 million and $10 million is 2.53%. And other income categories are far below that -- generally less than 1%."

Those with incomes under $25,000, though, and those with no income, were audited more often than those earning between $25,000 and $1 million.

The vast majority of tax returns are now filed electronically with the IRS -- "e-filed." Filing a paper return shouldn't be reason enough to trigger an audit, but it is more likely to contain errors, which in turn can lead to an audit. The IRS has said, back in 2013, that "taxpayers are about twenty times more likely to make a mistake on their return if they file a paper return instead of e-filing their return."

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If your tax return includes Schedule C, it's because you're self-employed and/or a sole proprietor of a small business. It also means you face a higher chance of being audited. According to the folks at Nolo, the overall average rate of audit for all individual tax returns was recently 0.6%. But those filing Schedule C had an audit rate of 1.6%.

ALSO READ: How to Fill Out (and File) Schedule C for Form 1040

That's right -- a simple math error might get your tax return audited. That's because, for example, it can lead to numbers not adding up properly. When numbers don't add up, then your total tax or refund due may not be accurate. One math error might also suggest that there could be other errors in the return, making it worth a closer look. In 2020, the IRS reported more than a million math errors found in returns.

Did you forget to include your Social Security number on your return, or your spouse's? Are your names spelled correctly? Are you using the proper filing status? These kinds of errors can lead to an unsuccessful tax filing.

ALSO READ: Taxes on Investments: Understanding the Basics

This is a very basic error, but a bad one: forgetting to sign the return. If you're filing jointly with a spouse, you both need to sign. An unsigned tax return is invalid and will cause you headaches.

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Fortunately, tax audits aren't necessarily disastrous. Many times, the IRS will audit you simply because there's some question raised by your return. You'll have the chance to answer the question, and that's often all there is to it. As long as you're not trying to pull one over on Uncle Sam, chances are you'll be fine. Still, you might want to consult a tax pro -- and some, like enrolled agents, can even represent you in dealings with the IRS.

Here's another bit of good news: Overall, your chances of being audited are very, very small. CNBC has reported, "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."

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