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Red Flags That Could Trigger an IRS Audit

Red Flags That Could Trigger an IRS Audit

The IRS is a name every taxpayer and accountant hears every day. The IRS reviews the taxpayer's account and financial information to ensure the rules are followed. The IRS can initiate an audit up to three years after the tax return expires or up to six years if 25% or more of the income is excluded. If you have enough evidence to back up your tax deductions, this is one of the easiest processes. However, some common red flags can lead to a tax audit as well as what you can do to avoid trouble with the IRS. And as we go through this article, we'll talk about some major red flags that can land you in a not-so-sweet spot with the IRS.

Why does the IRS audit taxpayers?

These accidental errors are not seen or treated the same as the information on your tax return, which could be a sign of a bigger problem - potential tax evasion.

The IRS is looking for returns that simply do not add up. Tax audits can be random or initiated by auditors who want to look at the tax forms you have filed.

Unusual information tends to grab the auditor's attention. The IRS can compare your income with your taxpayers who are similar to you to look for inconsistencies. Or, if your taxes overlap with another taxpayer's, such as if you had business or investment transactions with someone else, the IRS might want to make sure that all information is correct and that no tax evasion has occurred or is occurring.

A tax audit can be done by mail, online, or by a physical meeting with an IRS agent. Regardless of how the audit is done, the process takes time that you probably don't have, so it's best to make sure you fill out the correct tax forms from the start.

Some of the red flags that can trigger are audit are:

Your numbers do not match.

A review or audit may be initiated when reported income or deductions do not match documents the IRS has on file, such as W-2, 1099, 1098, etc.

For example, if you want to get a tuition tax deduction under the Tuition Deduction or the Lifelong Learning Credit, the tuition you claim on your tax return must match the 1098 number that the school sends directly to the IRS.

If there is a large discrepancy or if there is no 1098, a request for additional information may be triggered.

Most individual tests are corresponding examinations.

You'll get an audit letter from the IRS. Be sure to read it. It doesn't mean you're in trouble or going to jail.

The tax auditors are simply looking for an explanation for the discrepancies.

Overstating expenses and deductions

Many people are reluctant to claim a home office deduction because they fear it will result in an audit. This can be a useful relief to help offset the cost of setting up and maintaining a home office. However, not everyone who works from home is qualified; the home office deduction is only available to the self-employed. You must frequently use your home for work. You don't have to have a separate office, but the least you can do is have a space where you can't do anything else aside from work. It should also be your main place of business or a place where you regularly meet clients or patients.

Report business losses

You can deduct many expenses when you own a business, but the IRS wants to make sure you don't start a business just to take advantage of the deductions. Your business may have more expenses than revenue in a few years, especially when you're starting, but the IRS is suspicious if you never turn a profit. Businesses that experience net losses year over year or seem close to breaking even are warning signs.

Virtual Currency Transactions

The IRS has just used nearly every tool at its disposal to track taxpayers who sell, receive, trade, or exchange bitcoin or other cryptocurrencies. On the first page of the 1040 statement, there is now a question about trading in cryptocurrencies.

Participating in cash transactions

A wide range of cash transactions over $10,000 must be reported under the Bank Secrecy Act. Otherwise, it will be considered an illegal act. So be careful when making a cash or deposit transaction, or you could face an IRS inspection.


The above list is not intended to be inclusive; it only informs you that certain acts may trigger IRS audits. There may be several such transactional activities observed by the IRS, not in a very positive way. So yes, regardless, make sure you are transparent with all your transactions.