The term “IRS audit” can understandably cause anxiety among taxpayers. Although audits are relatively rare, certain behaviors, discrepancies, and financial situations can increase your chances of getting selected for an IRS review. Below, we will explore these tax audit red flags by outlining some common triggers that may get the IRS’s attention.
As you move up the income scale, your chances of being audited increase. According to IRS data, taxpayers earning over $1 million were audited at a rate of 7.4% compared to 0.5% for those with incomes less than $200,000. While you shouldn’t be discouraged from earning more, be sure to provide accurate, thorough documentation with your tax return.
Large Charitable Deductions
Donations to charitable organizations can significantly reduce your tax burden. However, large or unusual charitable deductions relative to your income can trigger an audit. The IRS requires proper documentation for all donations, so always keep your receipts and detailed records.
Too Many Business Deductions
While deducting business expenses can lower your taxable income, an excess of these deductions relative to your income levels can be a red flag. Things like claiming 100% business use of a vehicle or excessive meal and entertainment deductions can entice the IRS to take a closer look. Be sure to document your business expenses thoroughly and only claim legitimate deductions.
Reporting Too Much Cash
Cash transactions over $10,000 need to be reported to the IRS. This requirement applies to both businesses and individuals. Failing to report large cash transactions, or structuring transactions just below the reporting threshold—known as “structuring” or “smurfing”—can lead to suspicion and potentially an audit.
Home Office Deductions
While many work-from-home individuals are entitled to a home office deduction, excessive or high claims in relation to your income might raise eyebrows at the IRS. Always remember, to qualify for the home office deduction, the space must be used regularly and exclusively for business.
Not Reporting All Income
The IRS receives copies of all your W-2s and 1099s. If your reported income does not match the information the IRS has on file, they will definitely notice, and it could lead to an audit. Ensure you report all your income, even if you don’t receive a W-2 or 1099.
Making Mathematical Errors
Mistakes happen, but recurrent or severe errors can draw unwanted attention. The IRS is more understanding to those who are transparent, honest, and careful in their tax calculations. Using tax filing software or working with a professional can help prevent such mistakes in your return.
Filing Incomplete Returns
Failing to file or filing incomplete or inaccurate tax returns is a clear red flag for the IRS and can lead to penalties and, possibly, an audit. Ensure that you submit a complete and accurate return each year.
Ensuring you file your tax returns accurately, honestly, and with proper documentation can go a long way toward reducing your chances of triggering an IRS audit. While this isn’t an exhaustive list, these are some of the common triggers that might attract scrutiny. If you’re uncertain or have complex tax situations, consider reaching out to us at Creative Tax Solutions for help with your tax preparation and planning. We can guide you to ensure that your tax returns are accurate, minimizing the chance of tax audit red flags.