7 Red Flags That Can Trigger an IRS Audit

As you gather your tax documents and compile information for your tax preparers, the following question might cross your mind: “What are my chances of getting audited?”
If you’ve contemplated this possibility, you’re not alone — it’s a question that many people pose to their tax preparers.

According to the 2014 Internal Revenue Service (IRS) Data Book, the IRS audited 0.9 percent (yes, less than one percent) of all individual income tax returns filed in calendar year 2013.1 So your odds of getting audited are pretty low, and you can probably expect them to stay low, as the IRS is short on personnel.

With this good news in mind, it’s still important to remember that your chances of being audited can increase when claiming the earned income tax credit (EITC) at an income level that falls between $25,000 and $100,000. In 2014, only 2.4 percent of taxpayers with income ranging from $100,000 to just below $200,000 were audited, according to the Data Book records.2 But your chances of being audited can increase if you fall at that same level of income and you’re reporting business activities (e.g., filing Schedules C, E or F). Historically, those taxpayers who report business activities and have an income of at least $200,000, but under $1,000,000, are more likely to get audited — 2.7 percent of those filed in calendar year 2013.3

7 Red Flags That Can Trigger an IRS Audit

Besides the above, what are some other red flags that may increase your chances of getting audited?

1. Failing to report Form 1099s and W-2s

The IRS receives copies of all of your Form 1099s and W-2s, so make sure you report them as income on your return. Otherwise, the IRS’s computers might match these documents to your return and send you notice. If you do get an incorrect Form 1099 or W-2, notify the issuer immediately so they can correct it.

2. Having disproportionate deductions compared to your income

…But if you have the proper documentation for these deductions, claim them!
Don’t pay more than you have to pay.

3. Conducting business activities through cash-intensive businesses (i.e., bars, restaurants, etc.).

4. Claiming rental losses

5. Writing off hobby losses

Remember that the law generally bans writing off losses from a hobby — the activity must be run as a business and have a reasonable expectation that it will generate a profit. If the activity generates a profit three out of every five years, there is a presumption that you’re in business to make a profit, unless the IRS says otherwise. Keep all of your supporting documents!

6. Failing to report a foreign bank account

The IRS is looking for individuals with accounts in countries known as “tax havens.” The IRS uses voluntary compliance programs to encourage you to come clean if you have undisclosed foreign accounts.

7. Failing to report gambling winnings or claiming big gambling losses

Just like your W-2, the IRS also receives copies of Form W-2G. So if you receive a Form W-2G that asks you to report your winnings, report them!

If you have any of the above on your return, don’t report the deduction just to avoid an audit. Make sure you have all of your supporting documentation and have applied the laws correctly. That way, you can be ready to present them to the IRS if you’re one of the unlucky people who receive an audit notice. Just remember that approximately 40,000 audits in 2014 resulted in refund checks totaling nearly $830 million.4

 

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Irene Salum
Irene Salum

CPA | Director, Fuoco Group

Irene S. Salum, CPA, is a Director at Fuoco Group in Miami, FL. Irene provides assurance services and also specializes in accounting, tax preparation and planning, business valuation and forensic and litigation matters.

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7 Red Flags That Can Trigger an IRS Audit

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