Nobody wants to deal with an IRS audit, but every year, thousands of taxpayers find themselves under scrutiny. While some audits are random, others are triggered by red flags on tax returns. Even honest mistakes can attract attention, and if the IRS suspects something isn’t right, they may take a closer look at your finances.
Here are the things that could increase your chances of being audited.
Claiming Fake or Inflated Dependents
If you try to claim dependents who don’t actually qualify is a surefire way to get audited. Some people list relatives who don’t live with them, children they don’t support, or even completely fake dependents to get a larger tax refund.
The IRS cross-checks Social Security numbers and dependent claims, and if something doesn’t add up, they will investigate.
Failing to Report All Income
The IRS gets copies of your W-2s and 1099s, so if you fail to report income, they will notice. Whether it’s a freelance gig, rental income, or dividends, leaving out any earnings can lead to trouble. Even if you think a small side hustle doesn’t count, the IRS expects full disclosure. The more discrepancies they find, the more likely they are to investigate further.
Taking Too Many Deductions
Deductions help lower your taxable income, but excessive or unusual claims can raise suspicion. If your deductions seem too high for your income level, the IRS may flag your return. Common problem areas include business expenses, charitable donations, and medical deductions.
Claiming a Home Office Deduction Incorrectly
The home office deduction can be a great tax break, but it’s also a frequent audit trigger. To qualify, your home office must be used exclusively and regularly for business. If you claim the deduction but your workspace doubles as a guest bedroom, the IRS may question its legitimacy.
Be sure to meet the strict criteria and maintain clear records to support your claim.
Reporting Large Business Losses
If you report significant business losses for multiple years, the IRS may suspect that your business is more of a hobby. Businesses are expected to turn a profit eventually, and repeated losses may suggest you’re improperly writing off personal expenses.
To avoid an audit, ensure you have a legitimate business structure and clear documentation of revenue and expenses.
Claiming Too Many Charitable Contributions
Any donation to charity is commendable, but exaggerated deductions will raise red flags. If your charitable contributions are disproportionately high compared to your income, the IRS may want proof.
Large donations should be backed up with receipts, acknowledgment letters from charities, and proper valuation of non-cash contributions. Without documentation, your deduction may be disallowed.
Using Round Numbers Too Often
Tax returns filled with perfectly rounded numbers, such as $5,000 for business expenses or $2,000 for travel, will appear suspicious. The IRS knows that real expenses rarely add up to even amounts. Using too many round numbers suggests estimates rather than actual figures, increasing your risk of an audit.
Underreporting Self-Employment Income
Freelancers and self-employed individuals are at a higher risk of an audit because their income is harder to track. If you receive 1099 forms but fail to report all your earnings, the IRS will catch on. Cash payments must also be reported, even if there’s no paper trail. Keeping accurate records and reporting all income honestly is the best way to stay out of trouble.
Writing Off Personal Expenses as Business Expenses
Don’t mix personal and business expenses, because it’s a major IRS red flag. Some common problem areas include meals, travel, and vehicle expenses. If you claim that all your meals or vacations were business-related without proper documentation, the IRS may challenge those deductions. Keeping separate accounts for personal and business expenses helps prevent issues.
Making Large Cash Deposits
Banks are required to report cash deposits over $10,000 to the IRS, but making frequent smaller deposits can also draw attention. If the IRS suspects you’re trying to avoid reporting thresholds, they may audit your finances.
This is known as structuring and can lead to serious consequences. Always ensure your cash transactions are legitimate and properly documented.
Claiming Rental Losses Without Meeting Requirements
Rental properties can generate losses, but only those who meet the IRS’s criteria can deduct them. If you claim large rental losses without actively managing the property or qualifying as a real estate professional, the IRS may question your eligibility.
Keeping detailed records of rental income, expenses, and participation will help defend your deductions.
Making Frequent Amended Returns
It’s normal to file an amended return occasionally, but making frequent corrections can raise eyebrows. The IRS may start to wonder why your tax filings are constantly changing and whether there’s an issue with your record-keeping. If you need to file an amended return, make sure you have a valid reason and accurate documentation to support the changes.
Failing to Report Cryptocurrency Transactions
Cryptocurrency transactions are taxable, and the IRS has been cracking down on those who fail to report them. If you trade, sell, or use crypto for purchases, you must include it on your tax return. The IRS has sophisticated tracking methods and works with exchanges to identify unreported transactions. Keeping clear records of crypto activity is essential to avoid an audit.
Earning a High Income
The more you make, the more likely you are to be audited. While audit rates for most taxpayers are low, individuals earning over $500,000 per year face a higher risk. The IRS pays closer attention to high earners because they have more opportunities for tax avoidance. If you’re in this income bracket, meticulous record-keeping is key.
Claiming the Earned Income Tax Credit (EITC) Without Qualifying
The Earned Income Tax Credit (EITC) helps low-to-moderate-income workers, but improper claims are a frequent audit trigger. The IRS carefully scrutinizes those who claim this credit without meeting the qualifications. Filing with incorrect income information or claiming dependents improperly can lead to a full review of your tax return.
Not Reporting Foreign Accounts
U.S. taxpayers must disclose foreign bank accounts if their total balance exceeds $10,000 at any time during the year. Failing to report foreign assets can lead to severe penalties and an audit.
If you have overseas accounts, make sure you comply with the Foreign Bank Account Report (FBAR) requirements and disclose all income properly.
Taking Excessive Mileage Deductions
Self-employed individuals and businesses can deduct mileage for work-related travel, but claiming too much can attract attention. If your mileage seems unrealistic for your job or you fail to keep a detailed log, the IRS may question your claims. Using a mileage tracking app or keeping a written log can help substantiate your deduction.
Large Cash-Based Business Activity
Businesses that operate primarily in cash, such as restaurants, salons, and convenience stores, face a higher risk of audits. The IRS knows that cash transactions are harder to track, making underreporting easier. If your reported income seems too low compared to industry norms, expect scrutiny. Keeping accurate books and reporting all cash sales is the best defense against an audit.