5 Red Flags Likely to Lead to an IRS Audit

Posted by: Brookside Admin

If you've been the subject of an IRS tax audit in the past, you're likely willing to take all the necessary precautions to avoid going through that experience again. 

Even though a small percentage of tax returns are ever flagged by the IRS for an audit, it's still a common fear among Americans. Fortunately, there are some well known red flags that make your return more likely the be audited. Avoid the items on this list in your return if possible, or plan for the possibility of an audit, 

Inconsistent taxable income reporting

The same forms you receive at the start of tax season, 1099s and W-2s, also go to the IRS. So, if the taxable income you claim on your tax return doesn't match up with what's listed on these forms, it's pretty easy to tell. This is probably the most likely action to trigger an audit, and it's also the easiest to avoid. If the income listed on your tax forms isn't correct, get a new form issued to you with the correct amount. Don't simply adjust the amount on your return. 

Higher than average deductions

For some taxpayers, it's commonplace to fudge a little on the amount of deductions they've earned. The IRS knows this too. If your deductions claimed are disproportionate to your income, expect the IRS to notice and flag your return. This doesn't mean that you shouldn't claim all the deductions available to you, however. But, understand that if this year you've earned more deductions than usual, you'll need to have the proper proof that each deduction is legitimate because you're likely to face an audit. 

Total business use of your vehicle

If you have a company car, or use a vehicle as part of your own business, it's not likely that you never use that vehicle for personal errands. So, if you list on Form 4562 that a vehicle was only used for business, be prepared to prove that claim with detailed mileage logs and dates of each trip taken. If the vehicle in question happens to be a large SUV or truck, be especially cautious. These vehicles offer both favorable depreciation and write-offs and have commonly been used to defraud the IRS in the past. 

Retirement account early payouts 

If you were to take an early payout from your IRA, 401(k), or other retirement account before the age of 59 1/2, you'd likely incur a 10% penalty in addition to regular income taxes. Exceptions do exist that would keep you from having to pay that 10% penalty. Nearly half of taxpayers taking early distributions from retirement accounts failed to properly pay the penalty owed, however. Because of the large group of returns with mistakes in this area each year, anyone taking an early payout faces additional scrutiny. 

Owning your own business

If you're self-employed, you should know that Schedule C offers a number of tax deductions that you're likely to be eligible for. Unfortunately, a few bad apples have spoiled this opportunity by claiming far more deductions than they've actually earned. Like the other deductions mentioned above, be sure to overly document everything related to the deductions you're claiming because an audit is likely. This goes double if you run a business that often handles cash. That would include a taxi service, bar or restaurant, and other service industry businesses. 

If your tax return is likely to include any of these red flags, or you just need some help preparing an accurate return with proper documentation, contac the CPAs at Brown Kinion and Company. 

We have two offices for your convenience, one in Broken Arrow, and the other in South Tulsa / Bixby. Give us a call because it's never too early to start thinking about next year's tax return.