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IRS Audit Red Flags

tax auditor2Want to avoid an IRS audit?  Look out for these red flags on your return

Have you ever been tax audited by the IRS? If you are among the unlucky minority who have, then you already know that it is nothing short of a complete and utter nightmare. For the uninitiated, essentially if the IRS finds some error in your taxes, they look through your taxes to find the discrepancy, and can ask you (and “ask” is putting it nicely) to prove that your information is indeed correct. That doesn’t sound so bad, right? Wrong.

Misfiling your taxes can result in stiff penalties. When you’re selected for audit, there are different ways in can be conducted. Note that you don’t have a say in this, the IRS tells you whether you’re doing your audit by mail or in person. You will have to provide all of the documentation the IRS asks for. And if the IRS finds fault in your taxes, you might just have to pay the difference. Because of this, it’s highly recommended you hire a legal representative to help you get through it.

Of course, a better idea is to just avoid being audited altogether. On that note, below are 14 major red flags that will likely trigger an IRS tax audit. They are:

IRS Audit Red Flag #1: Mathematical errors

Most of us aren’t exactly math wizards. But when it comes to filing your taxes, you simply cannot make a mistake. All of your taxes are run through a computer, so if you botched the math somewhere along the line, it’s going to trigger a red flag. Before you send off the paperwork, triple check all the numbers and make sure everything adds up properly. The last thing you need is to find out you’re being audited because you accidentally wrote a 3 instead of a 4 somewhere on your forms.

IRS Audit Red Flag #2: Having a large deduction

When your deduction is more than average, it might catch the eye of the IRS system. Obviously you shouldn’t shy away from claiming your deductions, but when you have a big one, make sure you keep all the documentation for it on hand and stand your ground. Usually for something like this, the IRS won’t be too rough on you anyways as long as you can prove yourself.

IRS Audit Red Flag #3: Not disclosing all taxable income

If you fail to report all your taxable income, there’s a good chance the IRS will catch you. After all, part of their job is making sure you pay what you’re supposed to. To be perfectly blunt, when it comes to filing your taxes, do not screw around. Make sure you report all of your information properly and don’t leave out important details. It can and will come back to haunt you. Unless you’re Tony Soprano, it’s also important to be honest and clear about how you made that income.

IRS Audit Red Flag #4: Having a sleazy tax preparer

If you choose someone who’s a bit shady to prepare and file your taxes, you’ll attract some unwanted attention. Sometimes your preparer might use some less than appropriate methods, so if they are making promises that sound too good to be true, be wary. Remember, if the IRS comes calling on you, you won’t be able to get out of trouble by blaming your tax preparer; you’re still responsible for your own tax return. Do your research and pick someone with a good reputation.

IRS Audit Red Flag #5: Making abnormally large charitable donations

Donating to charity can be good for your taxes, on top of being good for your soul. You can write them off, after all. However, when you make a donation that is abnormally big in comparison to your income, that will raise some eyebrows, especially if you make a donation over $500 and don’t file your Form 8283 (the tax form you’re supposed to submit to the IRS when you or a business you own makes a non-cash donation over $500). If you made a large donation to charity, make sure you keep the records for it handy in case you attract the attention of the IRS.

IRS Audit Red Flag #6: Claiming losses related to real estate rental

Generally speaking, you usually can’t get deductions for real estate losses unless you either actively rented your property or spent over half of your working hours in real estate (as a professional). The IRS actively looks for people who claim rental losses incorrectly, so if you’re claiming them, you’d better have your paperwork in order. Always double check with a tax law expect to make sure you qualify for a deduction.

IRS Audit Red Flag #7: Discrepancies in alimony deductions

The rules for getting a deduction for alimony payments can be a little complicated, which is why a divorcee who qualifies (Ex. Someone who pays alimony by cash/check under a written separation agreement) should take care to ensure their information matches up with the recipient’s. If something doesn’t quite add up, you will get audited.

IRS Audit Red Flag #8: Deducting excessive business expenses

You can often deduct travel expenses, food expenses, and even some entertainment expenses when it’s related to business (like a business trip for instance). If you write off a disproportionately large sum, especially if it seems excessive in your line of work, you’ll set off some red flags at the IRS. Meals and entertainment costs are especially touchy. Make sure to keep all receipts for every business expense over $75 you plan to write off.

IRS Audit Red Flag #9: Not reporting a foreign bank account

If you have any foreign accounts, especially with a value over $10,000 USD, you have to report them. Failure to do so can result in hefty punishments. This also applies for if you have foreign assets. If you have anything like that, you should do your homework and make sure you’re filling out the proper paperwork. Look into the FinCEN form 114 and the IRS Form 8938 as well, as you may need to have one or both of these submitted.

IRS Audit Red Flag #10: Claiming the Earned Income Tax Credit

It’s no wonder the IRS is taking an extra look into people claiming their EITC. The Wall Street Journal reported that improper claims cost the government a whopping $10,000,000,000 a year. And the worst part is that most of the improper claims are simply human error. While there is a lot of fraud, the EITC rules are complicated and it’s easy to make a mistake. Make sure you give the IRS guidelines, found here to ensure that you qualify.

IRS Audit Red Flag #11: Claiming excessive business use for a vehicle

If you tell the IRS you only ever use a business vehicle for business, you’ll catch some attention. When you are writing off your car usage, make sure to keep detailed records of how far (and when) you travelled with it for business purposes, and be honest when filling out your tax forms. Trucks and heavy SUV’s are more likely to raise some red flags, as will claiming excessive business use when you don’t own a personal vehicle.

IRS Audit Red Flag #12: Not reporting your gambling winnings

If you win the jackpot, don’t push your luck. Report it properly. The casinos and race tracks keep track of this sort of thing, so if you don’t report it, the IRS will find out, and you will get in big trouble. Gamblers are required to report their winnings on their 1040 forms. Professional gamblers (such as professional poker players) report their earnings on their Schedule C’s. As a side note, professional gamblers can write off certain expenses like hotels and meals, and claim gambling losses, however the latter is likely to get the IRS’ attention.

IRS Audit Red Flag #13: Claiming the home office deduction

Since this deduction is easily abused, the IRS will take a close look at everyone who applies for it. If you quality for it, then you can get great deals, but you have to make sure your paperwork is in order. You only qualify if your home office is exclusively a work space though, so don’t try and write off your home theatre as your office. Oh, and it goes without saying that you have to use the workspace fairly regularly for it to qualify as well.

IRS Audit Red Flag #14: Lying or being disorganized

Ultimately, what it boils down to is if you really don’t want to be audited by the IRS, then just be honest, do your taxes properly and hang onto to important tax-related paperwork. The IRS aren’t the bad guys, they’re just trying to make sure you’re paying your share. We advise that you get a reputable tax preparer and if you do get audited in error (or because you made a mistake) then get a legal representative to help you out.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.