Faw Casson

Does Filing a Tax Extension Trigger an Audit?


IRS Audit not triggered by filing extension

April 12, 2022

While a widely believed myth, filing an extension of your tax return will not put you in the IRS's crosshairs for an audit. In fact, the IRS has been auditing significantly less than 1% of all individual tax returns in recent years, trending towards fewer audits from one year to the next. 
 
However, there are some things that may still trigger an audit. Here's a rundown of some of the top things that may catch the IRS's notice.
 
  • Not reporting all taxable income you received during the tax year is a big trigger. The IRS does receive W-2s and 1099s from businesses and financial institutions which get checked against what you report. At the very least this may get you a tax bill with penalties and interest.
  • If you make a lot of money you may also be assessed extra interest from the IRS. Due to the heat they've received over the perception of hitting lower income earners too hard, they are turning more attention to high-income individuals and businesses.
  • Making large charitable deductions may be suspect if they don't align with what the IRS perceives as a "normal" range for your particular income.
  • Due to the abuse that the IRS sees with self-employed businesses underreporting income and overreporting expenses, filing a Schedule C may just naturally make the IRS give your return a second look. Cash-heavy businesses such as bars, restaurants, hair salons, etc. earn extra scrutiny, as do large losses.
  • If you consistently report losses from a business year to year, the IRS may categorize it as a hobby. If it is a business, make sure that it is being run as one, and that you're making money three out of every five years to establish that you're attempting to make a profit.
  • Claiming mileage for a vehicle as 100% business expenses may raise a red flag. Generally, most vehicles are not used only for business, especially if there are no other vehicles available.
  • Incorrectly claiming the 10% penalty exception for taking funds out of a retirement plan prior to age 59.5 is also on the list of triggers. The IRS is looking hard at early payouts to make sure they are handled correctly.
  • Taxpayers can get into hot water by failing to report gambling winnings or overreporting gambling losses.
  • Failing to report money housed in a foreign bank account may lead to significant penalties. Make sure all monetary assets are reported.
 
At the end of the day, an audit is not a reason to panic. Save all documents proving that what you've reported is accurate. If you should receive a letter from the IRS, please contact your Faw Casson advisor immediately so we can help you quickly get the questions answered.