No one wants to get audited. Whether you’re an individual taxpayer or a small business owner in North Carolina, an audit from the IRS or the North Carolina Department of Revenue (NCDOR) can be time-consuming, expensive, and stressful.
But audits rarely happen at random. Most are triggered by specific red flags in your tax return. Understanding these triggers—and how to avoid them—can help protect you from unwanted scrutiny.
Common IRS Audit Triggers in North Carolina
Even though the IRS is a federal agency, their audit criteria apply to every state, including NC. Some of the biggest audit triggers include:
1. Large Deductions Relative to Income
Claiming unusually high business expenses, charitable donations, or itemized deductions that seem disproportionate to your income may raise questions.
2. Schedule C Losses (Especially Repeated)
If you’re self-employed and report losses year after year, the IRS may question whether you’re running a business or a hobby.
3. Unreported Income
If you forget to include 1099-NEC, 1099-K, W-2, or other income documents—especially if they’re on file with the IRS—you’re almost guaranteed a CP2000 notice or audit.
4. Home Office Deduction Abuse
This deduction is legitimate, but often overused or incorrectly claimed. If your square footage or percentage of use seems exaggerated, it can attract attention.
5. Mismatched Forms
If what you file doesn’t match what employers, banks, or clients report to the IRS, you may be selected for review.
Common NCDOR Audit Triggers
The North Carolina Department of Revenue has its own audit unit and regularly reviews returns for inconsistencies. Triggers include:
1. NC and Federal Return Mismatch
If your NC return doesn’t match the income or deductions reported on your federal return, the NCDOR may initiate a state audit—even if the IRS does not.
2. Underreporting Use Tax or Sales Tax
For businesses, failing to report or remit proper sales and use tax can result in an audit, particularly for online sellers or out-of-state purchases.
3. Nexus Issues with Multistate Income
If you do business in multiple states but don’t allocate income properly to NC, or if you fail to file returns here while having NC-based customers or operations, that’s a red flag.
4. Missing State Withholding
For employers, not remitting payroll tax or filing NC withholding forms (NC-5) on time will almost certainly result in enforcement.
Behaviors That Raise Audit Risk
Even if your math checks out, the IRS or NCDOR may still take a closer look if:
-
You’re self-employed with inconsistent income patterns
-
You file amended returns frequently
-
You file returns very late or not at all
-
You claim refundable credits without documentation
-
You fail to respond to previous notices or penalties
How to Reduce Your Audit Risk in NC
You can’t eliminate the possibility of an audit, but you can dramatically reduce the odds by following these steps:
✅ Keep detailed records of income, expenses, receipts, and mileage logs
✅ Report all income, even if no 1099 was issued
✅ Use accounting software or a tax professional instead of “guessing”
✅ Stay consistent with your business deductions and income reporting
✅ Respond promptly to any IRS or NCDOR notices
✅ File your returns on time and pay estimated taxes quarterly if required
What Happens If You Get Audited?
If you receive an audit letter:
-
Don’t panic or ignore it
-
Gather the requested documentation
-
Contact a qualified tax representative immediately
At Polaris Tax & Accounting, we’re licensed Enrolled Agents (EAs) with unlimited representation rights before the IRS—and we also handle NCDOR audits across North Carolina.
We Defend North Carolina Taxpayers in IRS & NCDOR Audits
📞 Call Polaris Tax & Accounting at 704-947-3178
🛡️ We handle IRS and state audits—start to finish
📍 Serving clients across North Carolina, including Charlotte and Asheville
📁 Available 100% remotely – no office visit needed