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Most Tax Returns Are Accepted as Filed, But Certain Anomalies Prompt Audits or Notices

S.J. Steinhardt
Published Date:
Mar 11, 2024

iStock-505890116 Audit 1040 Tax

The IRS accepts most tax returns, while identifying some for closer examination for various reasons, including random sampling, But there are five specific situations that often attract the attention of the IRS and prompt an audit, The Washington Post reported.

Math errors top the Post’s list. In fiscal year 2022, the IRS issued close to 16 million math error notices, the most prominent one involving the recovery rebate credit (11,633,930). The second most found error was for the child tax credit (4,250,168).

A second frequent audit trigger is failing to report all one's income. The IRS's “automated underreporter” program could generate a letter if it appears that not all income has not been reported. The IRS compares returns with documents it receives, such as W-2s or 1099s from employers or financial institutions for comparisons.

In fiscal year 2022, the IRS closed nearly 1.6 million cases under the automated underreporter program, resulting in more than $8.7 billion in additional tax assessments, the Post reported.

The average taxpayer is more likely to get a letter or a math error notice, rather than an audit, said IRS spokesman Eric Smith. “Fortunately, these notices can often be avoided by filing electronically and taking a little care upfront,” he said.

Substantially understating one’s income could result in the IRS penalizing filers with an accuracy-related penalty equal to 20 percent of their underpayment of taxes.

The third frequent audit trigger is out-of-the-ordinary deductions. Such deductions, such as those that appear to be out of line with one’s income, can arouse suspicions.

“Sometimes returns are selected based solely on a statistical formula,” the IRS said. “We compare your tax return against ‘norms’ for similar returns.”

The overstatement of business deductions is the fourth red flag.

“A common misconception is that you can write off the full cost of a vacation by just conducting a minor piece of business, or deduct the full cost of a car with only rare or occasional business use,” said Smith of the IRS. “Neither of these is true.”

To be deductible, a business expense must be both ordinary and necessary,” according to IRS Publication 583 (Starting a Business and Keeping Records). “An ordinary expense is one that is common and accepted in your field of business, trade, or profession. A necessary expense is one that is helpful and appropriate for your business, trade, or profession.”

Finally, a pattern of losses for a small business is the fifth frequent audit trigger on the Post's list. Such a pattern can cause the IRS to question whether a taxpayer is operating a profit-making business or an enterprise that is more like a hobby.

“If you do not carry on your business to make a profit, there is a limit on the deductions you can take,” according to IRS Publication 334 (Tax Guide for Small Business). “You cannot use a loss from the activity to offset other income.”

In fiscal year 2022, the IRS closed 708,309 audits, resulting in nearly $30.2 billion in ad­ditional taxes assessed.

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