4. Rounding or estimating dollar amounts
Another easily avoidable audit red flag is rounding or estimating dollar amounts on your tax return.
Say, for instance, you round $403 of tip income to $400, $847 of student loan interest to $850, and $97 of medical expenses to $100. The IRS is going to see all those nice round numbers and think you’re making them up.
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And if you actually make up numbers by, say, estimating your income or expenses, that’s another way to draw unwanted attention to your return. Remember, the IRS is getting information about your tax situation from other sources. If that information doesn’t match what you report on your return, the IRS computers are going to spit out your return for a closer look.
Plus, if you’re rounding or estimating certain dollar amounts, the IRS might start questioning everything else on your return, too. And that could lead to a much more intense audit. Fortunately, it’s easy to avoid this situation — just don’t ever round or estimate dollar amounts on your tax return.
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5. Claiming refundable credits
Refundable tax credits can drop your tax bill below zero and generate a tax refund. For instance, if your pre-credit tax bill is $1,000, a $1,200 refundable credit will trigger a $200 tax refund.
On the other hand, the best you can hope for with a nonrefundable tax credit is a $0 tax bill. For example, if you owe $1,000 in tax before applying a $1,200 nonrefundable credit, your tax bill will be knocked down to $0, but you won’t get a refund (i.e., you essentially lose $200 of the credit).
Because they’re often used to obtain fraudulent tax refunds, claiming refundable tax credits on your tax return can increase the odds of being audited. This includes the earned income tax credit (EITC), child tax credit, health insurance premiums credit and American Opportunity tax credit.
For example, as noted earlier, the IRS only audited 0.3 percent of all personal income tax returns for the 2018 tax year. However, the audit rate tripled, to 0.9 percent, for people who claimed the EITC on their return for that year. That translates into more than 150,000 additional audits just for people claiming the EITC.
If you’re legitimately eligible for a refundable credit, then you should absolutely claim it. Just don’t be too surprised if your tax refund is delayed because your return was pulled aside for a closer look.
6. Taking unusually large deductions
The IRS has been collecting taxes for a long time, so it has a pretty good idea of what to expect in terms of deductible expenses for taxpayers at your income level. So, if you claim a large deduction that doesn’t make sense for someone in your income range, the IRS computers are going to flag that deduction.
For example, if you make $50,000 during the year, the IRS is going to be suspicious if you claim $20,000 in donations to charity. While that might be a typical charitable deduction amount for someone with a high six-figure income, it’s quite unusual for people earning $50,000 per year.
But once again, if you do have a legitimate deduction, don’t be afraid to claim it even if it seems high. Just make sure you can back it up with receipts or other documentation if the IRS questions it.
7. Claiming credits you clearly don’t qualify for
One reason the IRS audits tax returns is to uncover tax fraud, such as claiming tax deductions and credits you’re not entitled to. In many cases, the IRS computers can’t tell if you’re claiming a tax break for which you don’t qualify. But sometimes it’s easy to spot.
