What Are the Warning Signs of an IRS Audit?

Worried about an IRS audit? Learn the warning Signs of an IRS Audit, and find out what to do if you’re flagged with this guide!

Worrying about an IRS audit is something no one wants to face. But if the Internal Revenue Service identifies certain questionable activities in your tax returns, you may be targeted for an audit. This guide will explain the types of red flags that trigger an IRS audit and steps that you can take to ensure a smoother process.

Unreported Income:

The most common factor that will trigger an IRS audit is unreported income. If the IRS detects a discrepancy between the income you’ve reported and what the agency expects, they may investigate to uncover any additional income that has not been claimed. Make sure to include all your sources of income, including investments and royalties, to avoid any discrepancies that may trigger an audit.

Discrepancies between Your Return and Third-Party Form 1099s

One of the most common IRS audit red flags is when there are large discrepancies between your return and any Form 1099s that have been issued to you. For example, if you received a large payment indicated on a 1099 that’s not reported on your return, this could be seen as an attempt to defraud the government and trigger an audit. To protect yourself, make sure to review all Form 1099s thoroughly and accurately report any payments and income on your return.

Reporting Non-Deductible Expenses as Deductible

Another potential red flag for an IRS audit is reporting non-deductible expenses as deductible on your return. This could include taking deductions for personal expense items such as haircuts, clothes, meals, entertainment costs, and other non-business related purchases. To avoid triggering an audit in this instance, make sure to review each deduction you’re claiming to ensure it follows the rules set by the IRS and is a true business expense.

Claiming Major Deductions without Supportive Documentation

If a taxpayer claims a major deduction that doesn’t match their reported earnings, an IRS audit could be triggered. It’s important to maintain detailed records that support these deductions and to include any relevant documentation such as bills, receipts, or other forms of evidence. If you’re facing an audit because you’ve claimed major deductions without backup paperwork, it’s best to contact a qualified accountant or tax professional who can help build your case and provide the necessary information.

Frivolous Tax Arguments or Large Refund Claims

Another red flag that can trigger an IRS audit is when a taxpayer files excessively large refund claims or makes propositions of tax structure or arguments that are clearly frivolous. The IRS views these arguments as attempts to delaying the payment of tax obligations and may decide to initiate an audit to determine the accuracy of their positions. Claiming larger refunds than earned will automatically draw the attention of the IRS, so it’s best for taxpayers to make sure all claims are valid before filing.