A recent study by the U.S. Government Accountability Office found that the IRS audited 0.25% of individual tax returns in fiscal year 2019, but certain red flags can dramatically increase your chances of scrutiny.1
These 14 audit triggers could turn your tax season into a nightmare, from suspicious deductions to unreported income. But don’t panic just yet – understanding these red flags could be your ticket to a stress-free filing.
1. Raking in the Big Bucks
High income is perhaps the surest way to attract IRS attention. Taxpayers with significantly higher incomes face a greater chance of being audited, as the IRS allocates more resources to examine high-income earners.
In fact, millionaires have a much higher audit rate compared to the general population.
The reasoning is simple – even minor errors on high-income returns can lead to substantial differences in tax revenue.
So, if you’re pulling in seven figures or more, be prepared for extra scrutiny of your financial affairs.
2. Failing to Report All Income
Nothing sets off alarm bells at the IRS quite like unreported income. The tax agency receives copies of all W-2s, 1099s, and other income reports, making it easy to spot discrepancies.
Even small amounts of unreported income from side gigs or investments can trigger a closer look.
To stay in the clear, wait until you’ve received all tax documents before filing. If you’re missing a form, contact the payer or the IRS for assistance.
It’s far better to delay filing than to submit an incomplete return that could raise red flags.
3. Math Errors & Typos
In the age of tax software, simple arithmetic mistakes are less common but still occur. Even minor calculation errors or typos can prompt the IRS to take a second look at your return.
While honest mistakes happen, too many errors may signal deeper issues for the IRS. Double and triple-check your work before filing, paying special attention to Social Security numbers, income amounts, and deduction totals.
Consider using tax preparation software or consulting a professional to minimize the risk of errors that could trigger unwanted IRS attention.
4. Excessive Deductions
While legitimate deductions are perfectly fine, claiming suspiciously high deductions compared to your income level is a surefire way to invite scrutiny. This applies to business expenses, charitable contributions, medical expenses, and more.
The key is to ensure your deductions are proportionate to your income and in line with IRS guidelines. Keep meticulous records and receipts to substantiate all claims.
If you have unusually large deductions in one year, be prepared to explain the circumstances if questioned.
5. Running a Cash-Heavy Business
Businesses that deal primarily in cash, such as restaurants, retail stores, and bars, face a higher risk of audits due to their reputation for underreporting income. The IRS knows cash transactions are harder to track, making these businesses prime targets for closer examination.
If you operate a cash-intensive business, accurate and detailed record-keeping is crucial. Consider using point-of-sale systems that track all transactions.
The IRS may use indirect methods, like comparing your lifestyle to reported income, to identify potential discrepancies in cash-based businesses.
6. Claiming Home Office Deductions
The home office deduction can be a valuable tax break but is also a common audit trigger. The IRS has strict criteria for these deductions, requiring that the space be used exclusively and regularly for business purposes.
To claim this deduction safely, ensure you meet all qualifications and keep detailed records of your home office use.
Measure the space accurately and be prepared to prove it’s used solely for business. Avoid claiming personal spaces like guest bedrooms as home offices to stay off the IRS radar.
7. Reporting Consistent Business Losses
While it’s normal for businesses to have ups and downs, reporting losses year after year can raise eyebrows at the IRS. The tax agency differentiates between genuine business ventures and hobbies that generate losses primarily for tax benefits.
If your business shows losses for multiple years, be prepared to prove it’s a legitimate enterprise operated with the intent to make a profit.
Keep comprehensive records and documentation to demonstrate your efforts to run a viable business, not just a tax shelter.
8. Large Charitable Donations
Generosity is admirable, but the IRS may flag your return if you’re giving away large charitable donations when you don’t have much income. While there’s no set threshold, donations that seem disproportionate to your income level can trigger scrutiny.
To avoid issues, keep detailed records of charitable contributions, including organization receipts and acknowledgment letters.
If you make significant non-cash donations, consider getting professional appraisals to support your claimed values.
9. Misclassifying Employees
Employee misclassification is a serious issue that can trigger IRS audits. Some business owners misclassify employees as independent contractors to avoid paying certain taxes and benefits. However, the IRS has strict guidelines on who qualifies as an independent contractor.
If you hire independent contractors, maintain clear documentation about the nature of their work and your business relationship.
Be prepared to justify their classification if questioned. Misclassifying employees can lead to hefty penalties, so getting this right is crucial.
10. Claiming 100% Business Use of a Vehicle
While many professionals use vehicles for work, claiming 100% business car use is a red flag for the IRS. It’s rare for a vehicle to be used exclusively for business purposes, and the tax agency knows this.
If you use a vehicle for business and personal purposes, keep a detailed mileage log to track business use accurately.
Consider using a mileage-tracking app to make record-keeping easier. Be prepared to justify your business mileage claims if audited.
11. Failing to Report Foreign Accounts
In our global economy, many taxpayers have offshore accounts. However, failing to report these can lead to severe penalties and increased audit risk. The IRS has stringent reporting requirements for foreign assets and income.
If you have offshore accounts, ensure you file all necessary forms, including the Foreign Bank Account Report (FBAR).
Report all relevant income on your tax returns. The penalties for non-compliance in this area can be steep, so staying on top of your foreign account reporting is crucial.
12. Cryptocurrency Transactions
As cryptocurrency becomes more mainstream, the IRS is paying closer attention to these transactions. Failing to report crypto income or capital gains can trigger an audit.
The tax agency has been cracking down on unreported cryptocurrency activity recently. Keep detailed records of all your cryptocurrency transactions, including purchases, sales, and exchanges.
Report any income or capital gains from crypto on your tax return. The IRS now asks about cryptocurrency activity on Form 1040, so answer this question accurately.
13. Claiming the Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a valuable benefit for low to moderate-income workers but is also a common source of errors and fraud. As a result, returns claiming the EITC face additional scrutiny.
If you claim the EITC, double-check that you meet all eligibility requirements. Be prepared to provide documentation supporting your income and qualifying children if requested. Accurate reporting is crucial to avoid issues with this credit.
14. Rounded Numbers
While it might seem harmless, consistently reporting income and deductions in nice, round numbers can raise suspicions at the IRS. It suggests you may be estimating rather than using actual figures.
Use exact numbers from your records when filing your tax return. If you must estimate a figure, clarify it’s an estimate, and be prepared to explain your calculation method if questioned.
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Nancy Maffia
Nancy received a bachelor’s in biology from Elmira College and a master’s degree in horticulture and communications from the University of Kentucky. Worked in plant taxonomy at the University of Florida and the L. H. Bailey Hortorium at Cornell University, and wrote and edited gardening books at Rodale Press in Emmaus, PA. Her interests are plant identification, gardening, hiking, and reading.
