Ever wonder exactly how the IRS selects individuals for an income tax audit? While the IRS has discretion to audit anyone they feel is not fully or correctly reporting their income, there are a few indicators that the IRS considers red flags. Regardless of whether you pay an accountant to handle your income tax return or do it yourself, it’s always a good idea to watch for these seven red flags that may trigger an IRS audit.
Taxes aren’t the easiest thing to do, especially when you’re looking to minimize the amount of taxes you pay or get the biggest refund possible. Mistakes are easy to make and that’s exactly what the IRS looks for. Checking and then double checking your income tax return for mistakes is a good strategy if you’re doing your taxes yourself. If you’re relying on an accountant, make sure you provide accurate information.
2. Missing information or missing return
Whether you forget to fill out the forms completely or you simply don’t turn them in, that’s a big red flag for the IRS. The deadline is fast approaching this April so if you haven’t completed your tax return, it’s a good idea to plan to do so soon. When you file it’s best to include all of your income to avoid an audit. The IRS gets copies of every tax document you get, including 1099s and W-2s, and knows when you’re forgetful.
3. Being too charitable
One of the oldest income tax tricks in the book is to fake donating a significant portion of income to charity. In decades past, the IRS has been on the watch for people who seem too nice with their money. If you donate often, you can save every receipt so you claim only what you’ve donated and have backup data to support your claim.
4. High Income
Individuals and couples making over $200,000 are more likely to be audited. In fact they have a one in 25 chance. The more you earn, the higher scrutiny you’ll see on income tax returns, including a higher audit rate.
Deductions raise auditor eyebrows and the more deductions you take the more likely you are to attract the attention of an audit. The IRS knows which deductions are most common and which make sense for people in your income bracket. Take all the deductions you’re entitled to, but be sure to have some evidence to back them up.
6. Small Business Owners and Home Office Deductions
If you run a small business that operates primarily in cash, the IRS might be more likely to audit you. Cash doesn’t always get reported—which means the IRS is more likely to want back up information for your income. Claiming home office deductions is also another reason the IRS audits small businesses because dividing your work and home life can be difficult.
7. Not reporting a foreign bank account
While this isn’t a common problem for most Americans, the IRS’s mission to target foreign bank accounts shouldn’t go unnoticed. Over the last few years, the IRS has put pressure on major overseas banks to release information to target those individuals with accounts. If you don’t declare your foreign bank accounts, you might be at risk for severe penalties and fines.
Tax season is in full swing and if you haven’t started to prepare your tax return, now is the time.