No one takes pleasure in a tax audit. Most people who have been audited will likely tell you they wish they had seen the warning signs ahead of time so they could have been better prepared – or avoided an audit altogether.
For an individual taxpayer, the odds of getting audited by the Internal Revenue Service (IRS) are around one in 250. However, certain circumstances and tax positions can increase those odds significantly.
The following are some of the biggest tax audit red flags to look out for:
You forgot to report some income
In the age of side hustles and the gig economy, it’s more difficult than ever to keep track of all sources of income. You may forget about a brief stint as a dog walker in January by the time tax season comes around the next year. But, you must accurately report this type of income, no matter how fleeting the occupation.
It will likely come as no surprise that the IRS is not reliant upon individuals to report all of their sources of income. They receive their own copies of your W-2s and 1099s like you. Any discrepancies between what you report and the information they obtain independently will raise a red flag and potentially trigger an audit.
You make a lot of money
The more you earn, the more likely the IRS will audit you, especially if you are a business owner. The odds of being audited rise to around one in 100 for those who take home between $200,000 and $1 million per year.
Your write-offs sound iffy
Deductions are a great way to save on your tax bill, but some write-offs are more likely to raise red flags than others. These include:
- Business expenses that sound like hobbies, like horse breeding
- Using a vehicle 100 percent for business purposes
- Rental losses (especially for non-real estate professionals)
- Disproportionate charitable contributions (the IRS knows what the average filer at every tax level donates to charity)
If any or even all of these apply you to, it doesn’t mean an audit is imminent, but you might want to be even more diligent in ensuring the thoroughness of your return. If an audit or other legal problem with the IRS does arise, you are best served by taking action at the earliest sign of trouble.