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 If I Amend My Taxes, Will I Be Audited? A Guide to Tax Audit Triggers

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One question that typically comes to mind when submitting amended tax returns is: will I be audited if I amend my taxes?

March 23, 2024
Author: NCH

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Accurate tax returns are vital to maintaining good standing with the IRS. But there’s no need to panic if you’ve made an error on your deductions or income. You can amend your returns using Form 1040X.

While it’s perfectly normal to be concerned about attracting unwanted attention from the IRS, many misconceptions about amended returns need to be debunked.

In this blog, we’ll discuss what triggers an IRS tax audit and explore the different ways you can reduce the risk of an audit. 

If I Amend My Taxes, Will I Be Audited?

The IRS has formally stated that amended tax returns will not automatically trigger a tax audit. 

According to its official website, all original and amended returns undergo the same screening process, during which they select which returns need further review.

How does the IRS choose which returns to audit? Sometimes, the returns are picked randomly. The IRS typically uses a statistical formula to compare tax returns against a standard return to choose the audit randomly.

The National Research Program develops these standard returns using a random sample from other taxpayers like you. They will use the information gathered from this group to update its criteria for selecting returns. 

So, if your filing was picked for audit, it doesn’t necessarily mean there’s a problem with it.

However, the IRS is also on the lookout for red flags. If their screening finds anything unusual in your return, it will flag it and submit it to an auditor for further review. 

The auditor will then determine whether your amended returns are reasonable and accurate. If they think your return needs to be audited, they will forward it to a different audit group, who will confirm if it’s audit-worthy.

Truthfully, it’s hard to say whether you’ll be audited. But one thing is clear: the IRS does not consider amended tax returns a primary cause of tax audits.

What Triggers A Tax Audit?

While tax audits seem unavoidable, you can decrease their likelihood by understanding what triggers them. Some of the most common tax audit triggers include:

Math Errors

According to the IRS, math errors are one of the country’s leading causes of tax audits. Their automated processes find millions of math errors on tax returns every year. In 2022 alone, the IRS sent close to 16 million math error notices.

Back Taxes

You will likely be selected for an audit if you’re a high-income earner with thousands of back taxes. After the Inflation Reduction Act (IRA) was enacted, the IRS created the High Wealth, High Balance Due Taxpayer Field Initiative, which prioritized collecting back taxes from taxpayers with a total income of over $1 million and tax debt of over $250,000. 

Since its launch, the program has collected over $482 million in back taxes from 1,600 millionaires. 

Digital Asset Transactions

Any transaction involving virtual currencies and similar digital assets is a major red flag for the IRS. This comes after reviews of records from digital currency exchanges showed a potential non-compliance rate of 75% among taxpayers. 

In Form 1040, you’ll see a question asking whether you’ve engaged in transactions that involved these digital assets. If you answer yes, you must provide records documenting your purchase or receipt of the digital asset. 

It would also help if you provided documentation on the fair market value of all the digital assets you’ve received as income or payment. 

Underreporting Income

Underreporting your income is one of the easiest ways to catch the attention of the IRS. 

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The IRS receives copies of the forms that report your income, such as Form 1099, W-2 Form, and Schedule K-1. If they see any discrepancies between your tax returns and these forms, you’ll surely receive an audit notification from one of their representatives. 

Disproportionate Deductions

There are several items that a small business can deduct from their taxes, such as:

  • Office supplies
  • Business insurance premiums
  • Office rent and relocation expenses
  • Internet and phone bills
  • Marketing and advertising
  • Employee salaries and benefits

However, if your deductions are disproportionate to what an average taxpayer of your income range claims, it could trigger an audit from the IRS. 

According to the IRS, a business expense must be ordinary and necessary to qualify as a deduction. Ordinary means the expenses are common and accepted in your trade of business. Meanwhile, necessary refers to helpful and appropriate expenses for your business. 

If one of your itemized tax deductions doesn’t fit both categories, it would be best to take it off the list. 

Large Amounts of Cash Transactions

The IRS typically conducts tax audits on small businesses with large cash transactions primarily because these exchanges are harder to trace and easier to underreport. Moreover, they can sometimes indicate criminal activities like tax evasion and money laundering. 

How to Reduce The Risk of Tax Audits 

If you want to reduce your small business’ risk of getting tax audited, here’s what you must do:

File Accurate & Complete Returns

The best way to prevent tax audits is to submit accurate tax returns. Carefully review your forms before you submit them.

Ensure that all of your income and deductions are recorded and documented properly. This way, you can avoid the likelihood of amending your tax returns effectively.

Maintain Proper Bookkeeping Practices

Proper documentation is vital during tax audits. It serves as the foundation for your claimed deductions and credits. If you fail to substantiate your amended returns, you could face penalties. 

That being said, you must maintain proper bookkeeping practices. Organize your receipts and keep them in an area that will protect them from hazards like water damage and fire. 

The IRS recommends that taxpayers keep their supporting tax documents for at least three to seven years.

Maintaining proper record-keeping practices promotes transparency and accuracy, decreasing your risks of getting audited again. 

Get Help From A Tax Expert

Tax experts can bring invaluable insight into minimizing the risks of tax audits. They can help you prepare accurate tax filings, identify potential audit triggers, and guide you if you get audited. 

Hire An Experienced Tax Professional Today

If you need help filing your amended tax returns, let NCH assist you. NCH is one of Nevada’s top-tier business formation service providers. 

Our team of tax experts will help you through every step of the process and ensure that your amended tax returns are filed accurately. Don’t let your fear of tax audits overwhelm you; let NCH handle your taxes today. 

To learn more about our services, you can visit our website here or call us at 1-800-508-1729 to schedule a consultation.

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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