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7 Red Flags That May Lead to a Tax Audit

Updated: Feb 15, 2023

Tax season makes a lot of people nervous.  They are worried that they might owe money or that they haven’t done their taxes properly.  They worry about whether or not they will get a notice that says they are being audited.  The truth is that most people can relax.  Even if you did make a mistake, most aren’t severe enough to trigger an audit.  However, as you do your taxes this year, pay attention to these seven red flags that may lead to a tax audit, or if not an audit then the letter from the IRS that states you made a mistake or forgot something and they changed the return and you owe them money.

High Income

The biggest red flag that may trigger an audit is having a high income.  The reason is simple: the IRS is not going to waste their resources pursuing someone who is cheating them out of a few hundred dollars.  It would cost far more to investigate than they would get back.  However, those who pay hundreds of thousands in taxes every year, they are the ones that make the IRS more money.  Here is a rough breakdown of your chances of being audited:

If you make up to $200,000, your chances of an audit are about .9%.  $200,000 to $1 million those chances jump to 3.25%.  If you make over $ 1 million they surge to 11.1%.  Keep in mind that sudden increases in income can also trigger those audits.  It might look a little odd to the IRS if you make $100,000 one year and the next year you are only reporting $25,000 in taxable income.

Failure to Report Income

This should be a no-brainer.  If you receive a W-2 or a 1099 form, and you don’t report that as income, then you are going to be caught.  It might take a few years for the IRS to catch up with you, but when they do you won’t have a leg to stand on.  Report all of your income and don’t take the chance.

Not Using Fair Market Value

This one is a bit trickier, and harder to catch (unless those who are doing their reporting are blatantly careless).  Let’s suppose you need to buy a new piece of equipment for your truck.  When brand new the equipment might be $10,000 and used it could be $5,000.  You might be tempted to buy the used piece, and write off on your taxes the amount for a new piece.  Can you get away with it?  Yes, you can.  But it could trigger a red flag and cause the IRS to come knocking.  Now you could always up your odds of being caught by claiming you paid $20,000; but most wouldn’t even dream of taking that chance. Be sure to keep all receipts for major items to back up your deductions.

Typos and Entry Errors

Let’s face it, mistakes happen.  No matter how careful you are, your tax return may end up with a typo, or worse you could put the decimal point in the wrong place and cause your numbers to be off by thousands.  Make sure you double-check your tax return carefully so that you aren’t audited because you misspelled a word or two.

Missing Forms

As an owner-operator, you know there are a lot of forms that go into filing your taxes.  You don’t get the luxury of a simple W-2 (but you also don’t have the restrictions that come with being an employee).  If you do your taxes on your own, then you run the risk of missing necessary forms.  Usually it is worthwhile to hire an accounting firm to do your taxes to make sure that everything is done correctly.

High Charitable Giving

Charitable giving is a great way to help others and reduce your tax burden.  But if you are making $75,000 per year, and claiming that you give away $50,000, you are going to raise some flags at the IRS offices.

There is nothing wrong with giving away vast amounts of money.  Just be aware that doing so could trigger an audit, and you want to make sure to have a perfect tax return if that happens.

It is necessary to have documentation of all charitable gifts. Ask for a receipt when you give something.

Business Owner

The simple fact that you are a business owner puts you at a higher risk of being audited.  Why?  It is because it’s easier for business owners to cut corners than a W-2 employee.

Employees can’t write off miles driven for work (generally speaking).  Employees don’t get to deduct business expenses.  Employees don’t have marketing consultants, business lunches, insurances to pay for, and a whole host of other expenses that a business owner does.  So when it comes tax season, the employee’s tax return is pretty straightforward.  But as a business owner, you have more opportunities to cut corners (not that you would), and thus are thrust into a higher risk category.

Audit is just a big scary word to say that the IRS will double check your return to make sure that you didn’t lie or cut corners.  If you take the time to do your taxes properly, and make sure you’re following the rules, then you really have nothing to worry about.  Even if you are audited you will be able to prove everything is legit.

By working with a reputable tax company like ATBS you will be able to rest easy knowing that your taxes will be done properly and the risk of an audit will be decreased significantly.

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