An audit doesn’t always mean that the IRS suspects you of fraud. However, if your tax return includes one or more IRS audit red flags, you might find yourself under investigation.
Even if you know you haven’t done anything illegal, IRS audits can be extremely stressful and time-consuming. Before you submit your tax return, it’s a good idea to check for anything that might catch the IRS’s attention.
What are the most common IRS audit red flags? Let’s take a closer look.
What Triggers Most IRS Audits?
What triggers the IRS to audit someone? Tax returns might get flagged when your income, deductions, or losses don’t line up with what the IRS expects.
Once you send in your tax return, the IRS compares it to tax forms (like W-2s and 1099s). If something doesn’t match up, it might look closer. There are many potential tax return red flags.
7 IRS Tax Audit Red Flags to Watch For
What triggers an IRS audit? Here are some common examples.
1. Unreported Income/Mismatched Forms
You might wonder, “How can unreported income trigger an IRS audit if the IRS doesn’t know about it?”
When you get a tax form like a W-2 or a 1099, the person or company that gave you the form sends one to the IRS, too. If you don’t report that income (or if the numbers you entered on your tax return don’t match the numbers on the form), the IRS might want to conduct a review.
2. Unusually High Deductions
Some people will try to reduce the taxes they owe by inflating their deductions. If you report very high business deductions or other large write-offs, the IRS might want to verify that you’re being truthful.
3. Large Charitable Contributions
Making charitable contributions that are high compared to your income can be a sign of potential fraud. You should always make sure you keep records to show that your donations are legitimate.
4. Gambling Winnings/Losses
How do gambling winnings and losses impact tax audits? Gambling winnings are usually taxable, but you may be able to deduct your losses. Having losses exceed winnings can be a red flag for an IRS audit.
5. Repeated Loss Claims
What are the IRS hobby loss rules and audit risks? A business tries to make a profit, but a hobby does not. Under IRS hobby loss rules, you can only deduct expenses up to the amount of income a hobby generates.
If you have a business, you can deduct excess losses. Some people try to classify hobbies as businesses to offset personal expenses. If you have a business that keeps operating at a loss, the IRS might want to make sure it’s not a hobby.
6. Self-Employment Income
In itself, self-employment income isn’t really a red flag. So what will trigger an IRS audit? If your income is very high and you have substantial deductions, the IRS might want to take a closer look.
If your business handles a lot of cash or you overstate your expenses, you might be at increased risk for an audit.
7. Some Jobs and Industries
Unfortunately, some lines of work might face greater IRS scrutiny because income and expenses are harder to verify. If you’re in construction, real estate, or the medical or legal field, you might be at more risk for an audit.
Similarly, if you’re in an industry that deals with a lot of cash, the IRS might be more likely to flag your return.
Why Would the IRS Flag Your Tax Return?
Has the IRS flagged your tax return for an audit? If so, take a deep breath and don’t panic. In many cases, a return gets flagged because the IRS noticed one (or more) of the following:
- Missing or unreported income
- Very high (or otherwise unusual) deductions
- Consistent business losses
- Inconsistencies in your return
In many cases, the IRS will flag a return because it needs more information, not because it actually believes you did something intentional.
For example, if you have a small business, it’s possible to legitimately have that business operate at a loss for a couple of years. However, some people will try to report a hobby as a small business to try to offset personal expenses.
If your business has suffered losses for multiple years, the IRS might just want to take a closer look at your records to make sure you’re operating a real business.
The Importance of Understanding IRS Audit Red Flags
No one wants to get audited by the IRS. Double-checking your return for accuracy is important, and understanding why the IRS conducts audits can make things less stressful. Getting audited doesn’t necessarily mean you did anything wrong. Sometimes, the IRS just wants to double check your numbers or ask for further information.
