3 Red Flags That Can Get You Audited
When most people think of an audit, they imagine a court scene in which you and your entire financial life are put under a microscope. Or people picture someone from the IRS showing up at their doorstep and demanding thousands of dollars.
In reality, getting audited is nowhere as intimidating: Most audits under $200,000 are conducted via mail correspondence. And they usually get triggered two or three years after you’ve filed a return (so make sure to hold on to those receipts for up to three years).
What Are My Odds of Getting Audited?
It’s actually pretty small. For all individual returns in 2021, the audit rate was less than 1 percent (it actually hit a decade low of 0.2 percent due to IRS budget cuts and COVID-19). But for individuals filing with a Schedule C — the form you must use if you have 1099 income — your odds of getting audited are higher.
Still, overall, your odds of getting audited are low — just a few percent out of 100. But certain actions or deductions will increase the likelihood of investigation. The IRS uses complex algorithms to comb through tax return data and flag individuals for an audit.
Here are three moves that will increase the likelihood of getting flagged for an audit:
1. Your Reported Income Doesn’t Match Your Tax Documents (1099s)
If you earned more than $600 as an independent contractor, you’ll likely get a 1099 form from the company you worked with (similar to the W-2 form employees get from their employer).
In the case of forms 1099 and W-2, both you and the IRS receive these forms. So when reporting income on your Schedule C and 1040, make sure the income amount that you report matches what’s on your 1099 and W-2s. If there’s a mismatch, this calls attention to your return.
Pro-tips:
Know your forms. On-demand companies like Uber sometimes will issue a 1099-K form to report certain earnings. While a 1099-NEC only includes payments that went into our bank account, the 1099-K form includes all of the money Uber has taken out of passengers’ accounts, even the commissions and fees that Uber takes (which never reach your bank account). So make sure you report the gross number on your 1099-K and deduct Uber’s fees and commission as an expense. We’ll show you how to do this here: What is a 1099-K?
Worried there’s a mistake on your 1099 form? Make sure to contact the company as early as possible to investigate and issue a corrected form.
(Don't forget, the FREE Stride app can help you save thousands of dollars on your tax bill and hours of tax prep time by automatically tracking your miles and expenses, surfacing money-saving deductions, and getting your forms IRS-ready.)
2. You Deduct Business Mileage That You Can’t Prove
The IRS looks closely at deductions that have been abused by taxpayers in the past. When it comes to over-inflated deductions, the mileage deduction is historically suspect number one. Make sure you’re not claiming mileage that you can’t back up with either a mileage tracker like the Stride app, or with a manual mileage log with odometer photos.
For rideshare and delivery drivers, you can deduct mileage:
On your way to your first passenger or delivery
Between passengers or deliveries
Whenever you're online and working with your on-demand app
Pro-tips:
Get a mileage tracker like Stride. If you're tracking your mileage by hand, you're probably missing out on deductible mileage. Download Stride to make sure you maximize how much mileage you write off and have the peace of mind that you can back up that deduction.
Haven’t been tracking all of your mileage? You may be able to find a safe way to prove untracked mileage. Here’s what to do if you weren’t tracking your mileage.
3. You Claimed a Business Loss for Multiple Years in a Row
Beware of claiming a business loss for consecutive years. This could cause the IRS to suspect you’re deducting losses from a hobby, but not a real business.
If you’re claiming a loss, make sure you have the evidence to prove it; your return will automatically be more suspect. What the IRS wants to know is that you’re honestly trying to run a business rather than pursuing a hobby and claiming it as a tax write-off. Clear triggers would be writing off a boat when you’re a rideshare driver or other deductions that don’t match your line of work.
If you think you’ll claim a business loss this year, read this:
Independent workers who have health insurance can usually claim their insurance premiums as a business expense — but only if you earn a profit. If you claim a net loss (you have more business expenses than income), you can’t write off your premiums. The good news is, you’ll likely qualify for subsidies that help you pay your premiums.
Other Factors That Could Trigger an Audit
Here are some additional situations that might trigger an audit:
A business partner gets audited. Unfortunately, this means you’re more suspect as well.
You’re living beyond your means. The IRS has decades worth of data on how much people in certain industries make. If you’re claiming expensive deductions but living beyond your means, this could trigger an audit.
You incorrectly claim a home office deduction. Like the mileage deduction, the home office deduction is often abused. Therefore, the IRS looks carefully at returns that include home office deductions. Make sure you’re entitled to deduct your home office (it must be a portion of your home solely used for business and no other purpose — that’s right, no claiming your kitchen table unless it’s not for eating and just for working) and you’re not abusing it (only deduct the portion of your rent that matches the square footage of your office space).
You deduct meals that aren’t for business. Make sure you only deduct meals in which you can prove that you discussed business. Don’t try and deduct Valentine’s Day dinner unless they’re also your business partner and you spent the majority of the time discussing business, not your beautiful life together.
Hey, Sometimes Audits Are Just Random!
Yes, you can do everything absolutely right and still get audited. Why? The IRS randomly selects individuals from multiple financial profiles to conduct an audit. This randomized audit forces everyone to be more honest. For example, if only people of a certain income level get audited, say $100,000, then what’s to keep folks from making their books look like they made under $100,000?
At the end of the day, it's important to remember that being audited doesn't mean you've necessarily done anything wrong, and it doesn't mean you'll automatically owe more in taxes. But just to be safe, take the few extra minutes each day or each week to gather up your tax deduction documentation, and store it in a safe place. If you're ever audited, you'll be glad you kept good records.
Disclaimer: The information contained in this Guide is not offered as legal or tax advice. The U.S. federal income tax discussion included in this Guide is for general information purposes only and is not a complete analysis or discussion of all potential tax consequences that may be relevant to a particular individual. In light of the foregoing, each individual should consult with and seek advice from such individual’s own tax advisor with respect to the tax consequences discussed herein. Any information contained in this Guide is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the U.S. Internal Revenue Code of 1986, as amended.