10 Red Flags That Can Cause an IRS Tax Audit

Are you wondering whether you are likely to be audited? Actually, less than one million Americans are audited each year. Among those most susceptible are taxpayers who fail to file a return or underreport their income. What else likely triggers an audit? Presented here are ten of the leading causes:
1) Significant change in income: A major change in income that surges or tumbles by an unusual amount compared to the prior tax year is a red flag.
2) Rounded numbers: Having a questionable number of figures that end in zeros or fives is a red flag, especially for small business taxpayers.
3) Charitable donations: Unusually large charitable contributions can trigger an audit, especially when the reported income is much lower than the value of the gifts.
4) Home office: Claiming your home office as a deduction is a target for audits because an office must be used regularly and exclusively for business to qualify.
5) Car for business: Claiming the use of a car for business can draw an audit because the deduction requires detailed mileage logs that substantiate the separation of business from personal use.
6) Business expenses: To be eligible for a deduction, purchases must be ordinary and necessary for your business.
7) Cryptocurrency: Last year’s 1040 asked if you received, sold, traded, or deposited any financial interest in virtual currency. Underreporting crypto transactions and failure to list all taxable trades are red flags.
8) IRAs and 401(k)s: Failure to include all documentation with your 1040 and reporting all income from IRAs or 401(k)s raises a red flag.
9) Health premium tax credits: Those receiving this benefit must submit Form 8962 with their tax return.
10) Earned income tax credits. Red flags include choosing an incorrect filing status, claiming children who do not qualify, and underreporting income.
By law, the IRS can go back three years when auditing returns. However, if they discover errors, the IRS can go back at least six years. To best avoid an audit, ensure your return is filed accurately and completely. Should you be notified of an audit, we advise you to work with a tax professional experienced in audits. Professional Tax Services is a locally owned provider serving over 3,500 local residents and businesses. For more information, call 661-259-1967 or visit www.protaxservices.com. Professional Tax Services, provides unlimited free tax planning advice to their clients.