15 Red Flags for An Audit

Man with a magnifying glass looking at documents
  1. Income. If you make more than $200+ thousand dollars a year your chance of an audit jumps from .86% or 1 out 116 up to 2.701% which is 1 out of 37. If you make over a million dollars it is 1 in 13 chances. If you make less than $200 thousand then your chance of being audited is .78%.

  2. Information Returns. A miss match between information returns such as 1099s, W-2s, etc. and your personal return.

  3. Personal Deductions. Higher than average deductions for your income bracket.

  4. You run a small business and you are filing a Schedule C. The Schedule C reflects higher or lower gross sales than most sole proprietors, especially, if your business is cash intensive such as taxis, car washes, bars, salons, restaurants, and so forth. As opposed to C-Corps, the IRS is shifting its emphasis to S-Corps, small LLCs, and small partnerships.

  5. Taking large charitable deductions. IRS has statistical averages based on income brackets.

  6. Claiming rental losses. IRS is aggressively scrutinizing these, especially, where people are claiming to be real estate professionals and showing lots of income from non-real estate activities. There is a special audit project just for this.

  7. Taking alimony deductions. The IRS knows that court orders frequently do not meet the requirements to qualify as alimony, so they are looking at this issue frequently. They also want to make sure that the paid spouse is reporting the alimony as income.

  8. Writing off losses for a hobby. You must make money three out of five years, or the IRS will challenge your so-called “business” as a hobby.

  9. Business meals, travel, and entertainment. Large amounts set off alarm bells, especially, if they are too high for the type of business or profession. Documentation of this area is critical and, if it is not there, you will lose the deduction.

  10. Failure to report foreign bank accounts. IRS has received billions in this recent area and wants more.

  11. Claiming 100% business usage of a vehicle. IRS does not like this. Make sure you document with mileage logs and precise calendar entries as to usage. If you are buying a vehicle late in the year and writing it off, this is a red flag. If you are taking both depreciation and standard mileage rates this is incorrect and a red flag.

  12. Claiming day trader losses on a Schedule C. Investor losses are subject to a 2% cap of adjusted gross income. People trying to avoid this try to qualify as traders and get ordinary losses and avoid the 2% limitation.

  13. Gambling. First, is the failure to report winning or claiming big losses. Also, people frequently attempt to be classified as professional gamblers so they can take the cost of their lodging, meals and so forth.

  14. Claiming a home office deduction. Here there is an exclusive use issue. In other words, are you using the portion of your home exclusively for work? Also, it must be the principal place of the business.

  15. Engaging in currency transactions. If you are dealing with large cash deposits you may be triggering suspicious transaction reports by banks or any other financial institutions, and this can result in an audit.