Does a large tax refund trigger an audit?

November 29, 2022 by Charla Suaste
IRS check with money surrounding it and 1040 form

A common concern for most – if not all – taxpayers is receiving a tax audit. Few things in life are as nerve-wracking as casually going through your mail, rifling through coupons and advertisements, only to find an IRS letter tucked inside. Even after opening an IRS letter and reading its contents, it can be difficult for many taxpayers to determine what may have triggered such a notice in the first place. So, let’s talk about what can potentially generate an audit and what steps you can take to try and avoid one.

First, to answer the question posed in the subject line: No, a large tax refund alone will not necessarily generate a tax audit. It is only if the facts and circumstances around why you received a large refund are questionable that the IRS may peek a little more closely at a filed tax return and subsequent documentation. This is especially true if the IRS suspects the taxpayer may have deliberately understated their income or overstated their deductions to generate a larger refund.

Good to know, right? Of course, you may still be wondering, “What else can potentially trigger an audit or notice from the IRS or the state?” Let’s talk about it.

For starters, please keep in mind that there is no tried and true formula to avoid a tax audit. The IRS, in particular, has a system called the National Research Program (NRP) in which taxpayers are randomly selected to be audited. Because these audits are for research purposes regarding tax compliance, they, unfortunately, select taxpayers at random and are much more intrusive than typical IRS audits. So even if you file an immaculate tax return, there is no guarantee you won’t be selected for such an examination.

Now, let’s talk about items we know may have the potential to trigger a tax audit:
 

The IRS believes you have unreported income.
One reason you may receive an IRS or state notice is regarding potential unreported income. This could be from a 1099 or W2 that was either missing from your tax return, listed incorrectly, or generated in error. In these cases, the IRS system may flag the missing income reported from a third party and a notice will be sent out to you.

Your filing status or claimed dependents seem unusual.
In certain cases, the IRS may question your particular filing status or the dependents you claimed on your return because they generated a larger tax refund or significantly reduced the amount of tax you owed. This does not necessarily mean that you filed your tax return incorrectly, but it could open you up to an IRS examination. In this case, you want to make sure that you have the proper documentation to defend the claims made on your return.

The itemized deductions on your tax return were particularly high.
Again, this does not mean that the claims you made on your return were wrong, but any unusually high amounts on a tax return may prompt the IRS to come knocking. If you do claim deductions, make sure to retain documentation, such as bank statements and receipts, in case the IRS wants proof of the legitimacy of such deductions.
 

These are just a few things that may prompt the IRS to issue you a notice or audit. Some simple tips to help avoid receipt of an audit are:

 

  • Check (and double-check) the numbers on your return before filing.
  • Use real numbers and receipts when filing your tax return. While it might be tempting to round up or estimate how much money you spent on say, charitable deductions, this will only cause you trouble in the future. If you do not have the documentation to prove your claims, we don’t recommend putting those items on your tax return.
  • Hire a tax professional to prepare your return! Even though it may cost some money upfront, a tax professional will be able to provide expert advice and help you make sure your return is properly filed.

Of course, as mentioned above, there is nothing you can do to make sure you completely avoid a tax audit. So, in addition to taking the above precautions, we also recommend that you purchase TaxAudit’s Audit Defense upon filing every year. If you ever receive an IRS or state audit, we will review the notice and your tax return and provide professional advice on what steps should be taken. In the event the notice is incorrect, we assign you to our team of world-class tax professionals who represent you from the beginning of the audit through the completion of your case. This includes reviewing your documentation and coming up with a strategy, scheduling and attending all in-person and phone appointments, and making sure you pay no more than what you rightfully owe. In some cases, our members are even due a refund they did not know they should’ve received! The cost of a membership is truly a small price to pay for the peace of mind you get in knowing that you never have to face the IRS alone.

If you would like more information on what a membership includes, we encourage you to peruse our website here or call our Customer Service team at 800.922.8348, and they would be happy to answer any questions you have.

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Charla Suaste
Communications Content Developer

 

Charla Suaste joined TaxAudit back in 2007 and, over the past 14 years, she has worked in a variety of different roles throughout the organization, including as a Customer Service Representative, Case Coordinator, and Administrative Services Assistant. She now serves as the Communications Content Developer and is passionate about writing, editing, and making even the most complex concepts easy to understand. Outside of work, Charla enjoys traveling, listening to podcasts, and spending time in her garden.


 

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