Navigating income tax law can be complex, and even honest mistakes on your tax return could trigger an audit from the IRS or the Minnesota Department of Revenue.

While audits are relatively rare, certain red flags may increase the likelihood of receiving that dreaded notice. Knowing what you can do to avoid them and how to prepare if you are audited might save you stress, time and money.

Common Red Flags That Could Trigger an Audit

Discrepancies Between Reported Income and Information Returns

If the income you report on your tax return doesn’t match the information reported on your W-2s or 1099s submitted by your employers, it’s a significant red flag. For instance, if you forget to include freelance income reported on a 1099-NEC, it could result in scrutiny.

Unusually High Deductions for Income Level

Claiming deductions significantly larger than what’s typical for someone in your income bracket may raise suspicions. While legitimate deductions should never be avoided, ensure they are properly documented to justify the amounts.

Home Office Deductions

The home office deduction is a legitimate write-off for many taxpayers, but it’s often scrutinized due to misuse. Claiming an overly generous square footage or failing to meet the "exclusive and regular use" requirements can be a red flag for the IRS.

Cash-Intensive Businesses

Running a cash-heavy business, such as a restaurant or salon, can attract attention from auditors. These industries are prone to underreporting income, making them a common focus for audits.

Claiming Large Charitable Deductions

Contributions to charities are tax-deductible, but excessively large contributions for someone in your income bracket may trigger an audit. Keep receipts and acknowledgment letters for all donations.

Failing to Report Foreign Accounts

If you have foreign bank accounts or investments, failing to disclose them properly on forms like the FBAR (Foreign Bank and Financial Accounts Report) can lead to penalties and a potential audit.

Rounding Numbers Too Often

Reporting rounded figures (e.g., $5,000 instead of $4,957) across your tax return can appear careless and raise questions about the accuracy of your return.

Early Retirement Account Withdrawals

Taking money out of a retirement account before the eligible age may trigger an audit, especially if the withdrawal isn’t reported properly or the associated penalties aren’t paid.

High Earners

While audits are statistically rare, individuals earning $200,000 or more are more likely to be audited than those in lower income brackets.

How to Prevent Being Audited

Double-Check Your Return

Mistakes, even small ones, can trigger an audit. Make sure all figures, deductions and credits are accurate before filing.

Maintain Comprehensive Records

Keep all receipts, invoices and records of income and expenses for at least three years after filing your taxes. For property-related deductions, records may need to be kept longer.

Be Honest and Transparent

Avoid exaggerating deductions or underreporting income. It’s better to miss out on a small deduction than to face penalties or an audit for overclaiming.

Hire a Tax Professional

A certified tax preparer or CPA can help you navigate complex tax laws and ensure your return is accurate and compliant.

Use Tax Preparation Platforms and E-File

If you’re not going to work with a professional tax preparer, utilizing one of the low-cost tax preparation platforms reduces the likelihood of mathematical errors that might trigger an audit by automatically calculating totals and checking for discrepancies. Additionally, e-filing often speeds up the process of receiving refunds and ensures your return is securely submitted to the IRS.

Avoid Overlapping Deductions

Certain expenses, such as a home office deduction, overlap with other areas. Be cautious to avoid double-dipping, as this could raise red flags.

Disclose All Necessary Forms

Failing to include forms like a 1099 or W-2 provided by your employer can lead to discrepancies and increased scrutiny. This can be especially complicated for freelancers and gig workers who may have many different forms. Adopt an organizational strategy to ensure none are overlooked or lost.

How to Prepare if You’re Audited

• Respond Promptly to the Notice: If you receive an audit notice, don’t panic. Read the notice carefully to understand what’s being questioned, and respond within the specified timeframe.

• Organize Your Records: Gather all relevant documentation for the items under review. If you’re missing anything, reach out to your bank, employer or other sources to retrieve the records.

• Consult a Tax Professional: If you’re being audited, consider hiring a tax attorney or CPA to guide you through the process. They can communicate with the IRS or Minnesota Department of Revenue on your behalf.

• Understand Your Rights: Taxpayers have rights during the audit process, including the right to representation and the right to appeal any findings.

• Be Cooperative but Cautious: Provide the requested documentation, but avoid volunteering unnecessary information, as it could expand the scope of the audit.

Need Help? Contact a Minnesota Tax Attorney Today!

If you’re concerned about an audit or have received a notice from the IRS or Minnesota Department of Revenue, you don’t face it alone. Call a Minnesota Lawyer Referral and Information Service (MNLRIS) referral counselor at 612-752-6699 to be connected with an experienced local tax lawyer.