Red Flags Increase the Chances of a Tax Audit

There are a number of red flags that can trigger one of the taxpayer’s worst nightmares- a tax audit. While the odds of being audited by the IRS are actually surprisingly low (less than 1 percent for those earning between $25,000 and $100,000 per year), some American taxpayers are at a higher risk for scrutiny than others. Although the IRS does not formally disclose which tax returns are more likely to be singled out, a closer look at the track record of the agency provides a few clues.

Red Flags that May Trigger a Tax Audit

Avoiding these triggers when possible can reduce the risk of being audited by the IRS.

  • Failing to Report Income: The IRS receives copies of all W-2 and 1099 forms and they compare them to the income reported on tax returns. When there are discrepancies, the IRS is more likely to take a closer look. While some taxpayers are audited right away, others may not receive an audit notice for months or even years after filing. Ordering a wage and income transcript can help taxpayers verify the information that has been reported to the IRS. Unfortunately, taxpayers may not have access to their transcripts for the current year until about 3 to 6 weeks after they have filed their returns.
  • Claiming Questionable Credits and Deductions: Certain types of deductions, especially those that are out of the ordinary for the average taxpayer in the same general income bracket, can cause the IRS to raise a few eyebrows. Charity, entertainment and travel expenses, and deductions for bad debts are often triggers. It is perfectly fine for people to take legitimate credits and deductions, but they should be prepared to back them up in the event of an audit.
  • Reporting Millions in Income: The IRS performed tax audits on approximately 16 percent of tax filers who reported over $10 million in coming in 2014. Apparently, the IRS considers people with the most money as those who have the most to hide.
  • Reporting No Income: Taxpayers who report no income due to operating losses and the like have a higher than average chance of being audited by the IRS as well. Approximately 5.3 percent of taxpayers who reported no income faced tax audits in 2014.
  • Filing an International Return: The IRS has significantly increased scrutiny of taxpayers who file international returns in recent years. Approximately 4.8 percent of international returns were audited in 2014.
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