The IRS is watching: 5 tax mistakes that could trigger an audit for New Jersey residents

💰 Even with potentially larger refunds, simple filing mistakes can trigger IRS or New Jersey tax audits.

🎰 Unreported income like unemployment benefits or gambling winnings is one of the biggest red flags.

📑 Tax experts warn excessive deductions and repeated business losses can attract scrutiny.

It is tax time, and even though most Americans can expect a bigger refund this year, its still important to make sure your return is accurate.

No one likes to get a letter from the IRS saying their return is being reviewed.

Here are the top things to avoid that can trigger an audit from the IRS and New Jersey.

For advice, I turned to Jack Tinari, Senior Advisor with the CSI Group. For more than 30-years, Jack has been helping individuals and businesses navigate the ever-changing landscape of tax law.

President Trump’s ‘Big Beautiful Bill’ did have some significant changes that can benefit New Jersey residents. Among the biggest changes is the ability to deduct more of your State and Local Taxes on your federal return.

Here are the things Jack warns could trigger the attention of the IRS or New Jersey that could lead to an audit.

Please note: Every tax situation is different. This article is intended as general advice only. Please seek the advice of a tax professional to address your individual situation.

Top 5 mistakes that could trigger an IRS audit:

Misreported or unreported Income

Tinari says this is “by far the most audited Item by the IRS,” and it can come in many forms.

For over 20-years, the IRS has been matching your filed return with the data being reported to them from third parties. This includes your employers, 1099 income, banks, brokerage houses and more. Assume any time you are paid anything, someone is reporting it to the IRS.

If there is a discrepancy, the IRS typically sends a letter (Form CP200) advising you that they found an issue and giving you a chance to address it.

DO NOT ignore this letter.

There are two most common unreported items in New Jersey:

1) Unemployment: Unemployment income must be reported on your federal tax return. In New Jersey, you are required to go online and download the form required for your tax return. Many people simply forget to do this.
2) Gambling winnings: Especially with the rise in on-line and mobile gambling, many people forget to include any winnings on their tax return.

Losses on Business.

Tinari warns that businesses who file ‘Schedule C’ to report their income and deductions and continually report losses have a great risk to be audited.
It is important to note that the IRS claims that small businesses that do not have a profit in two of the last five years are actually hobbies. It is up to the taxpayer to actually prove they have a profit motive.

Property Sale Losses

In today’s real estate market, especially in New Jersey, Tinari says losses are rare and the IRS knows this.
Most properties have appreciated significantly in the past 15-years. “Lately I have seen an uptick on properties where the taxpayer is reporting losses,” Tinari says, and that can be a red flag.

Real estate Professional

You can thank internet misinformation for the rise in this red flag.

Tinari says, “Many people who own rental properties have attended seminars or watched YouTube or TikTok videos where they convince you that you can claim that you are a ‘real estate professional. Then they get audited and find out that the real estate professional designation has specific criteria that must be met.”

Excessive deductions

This is one of the biggest areas the IRS tends to scrutinize, especially when the math just doesn’t add up.

“I always say when looking at a return ‘does it make sense?,’” Tinari says.

For example, “If someone makes $70,000 a year and they have $10,000 in charitable deductions, it would be unusual and probably raise some eyebrows, whereas someone making $1 million dollars with $10,000 in charity would barely raise an eyebrow.”

The bottom line: Keep all receipts so you can prove your deductions are legitimate if they are questioned.

New Jersey also audits returns—Common triggers

When you think of an audit, you probably think of the IRS, but the state will also pull returns for review if something doesn’t seem right.

Here are the top reasons your state returns may get audited:

Misreported or unreported Income

New Jersey and Federal taxable wages are often different, and many people incorrectly use the federal wages for New Jersey wages.

Tinari says this is because New Jersey taxes certain items differently than the federal government does.

This includes things like:

💲 Employee paid section 125 Health insurance
💲 Employee pension contributions
💲 403b and 457 retirement contribution
💲 HSA contributions

In many cases, Tinari warns, it makes your New Jersey taxable wages thousands of dollars higher than the Federal wages.

Real estate taxes

Tinari says, “In New Jersey you can only claim the lower of the amount paid for real estate taxes or the amount of the property you actually own.” For example, if you and your parents each own 50% of the home, you can only claim 50% of the taxes as a deduction. This is true even if you actually pay the entire tax bill.

New York City and New York State workers

This is one of those annoying rules that can trip up taxpayers if they are not careful.

If you work for New York City or New York State, but live in New Jersey, there are Section 414 and Section 125 deductions that need to be added back to your New Jersey wages.

Tinari says, “Over the past few years, many New York City and New York State workers who live here have been getting surprise notices for a few hundred dollars for forgetting to add these items back.”

While it is often a small thing, any discrepancy could open your entire return up to review by either the state of New Jersey or the IRS.

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