10 Factors That Raise the Risk of an IRS Audit

No one likes the idea of being audited. The term “IRS Audit” can strike fear into the heart of even the most diligent taxpayer. While an IRS audit doesn’t necessarily mean wrongdoing, understanding factors that might trigger one can help you avoid potential pitfalls.

So, what exactly can raise the risk of an IRS audit? Here are 10 common factors to keep in mind:

Discrepancies in Reported Income:

Always ensure that the income you report matches the information provided by your employers, clients, and financial institutions. The IRS receives copies of W-2s and 1099s. If there’s a mismatch, it can raise a red flag.

High Income:

Statistically speaking, the higher your income, the more likely you are to face an IRS audit. Individuals with notably high incomes often have complex returns which may attract scrutiny.

Taking Large Deductions:

While you should always claim the deductions you’re entitled to, large or unusual deductions relative to your income might get the attention of the IRS. Always have documentation to justify your claims.

Home Office Deductions:

If you’re deducting expenses for a home office, make sure you’re meeting specific IRS criteria. This deduction is closely looked at because it’s often misused.

Claiming 100% Business Use of a Vehicle:

It’s rare that a person uses a vehicle exclusively for business, especially if it’s the only vehicle they own. If you’re making this claim, maintain meticulous records.

Filing Schedule C:

If you’re self-employed and report income and losses on Schedule C, be accurate. Continuous business losses or large expenses can alert the IRS.

Foreign Transactions:

Having foreign bank accounts or other financial affiliations can sometimes invite an IRS audit. Always report foreign income and assets. Remember to file an FBAR if the total value of your foreign accounts exceeds $10,000 at any point in the year.

Engaging in Large Cash Transactions:

Banks and other financial entities report cash transactions exceeding $10,000. While having large transactions isn’t inherently suspicious, a pattern of large or unusual cash transactions might draw IRS attention.

Frequent Amended Returns:

While it’s okay to file an amended return if you realize a mistake, doing so frequently might make the IRS take a closer look.

Using Round Numbers:

Consistently rounding up or down to the nearest hundred or thousand can appear as though you’re estimating. Use precise figures whenever possible.

How to Stay Prepared

Understanding what triggers an IRS audit is a critical step in navigating your tax responsibilities. Always keep complete and organized records of all your financial transactions, especially those relating to your deductions. If you’re uncertain about a particular item or need clarification, consulting a professional or seeking expert advice can be invaluable. Remember, an informed taxpayer is an empowered taxpayer.

Our team at Pro Tax and Accounting understands the intricacies of tax and accounting services, including the ins and outs of IRS audits. If you have concerns or questions, we’re here to help. Stay compliant, avoid unnecessary risks, and trust us to guide you through the ever-evolving landscape of tax regulations.

Seeking expert tax and accounting guidance? Look no further. With years of experience, our professionals are equipped to help you navigate even the most complex tax situations. Don’t let the term “IRS Audit” unnerve you. We’re here to assist!