10 IRS Audit Red Flags

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Do you ever wonder how the IRS chooses which taxpayers it wants to audit?While the IRS audits only about 1 percent of all individual tax returns annually, you don't want to be one of the unlucky few to get audited.

The IRS says being selected for an audit does not always suggest that an error has been made. Returns are selected using a variety of methods, including:

  • Random selection and computer screening — sometimes returns are selected based solely on a statistical formula.
  • Document matching — when pay records, such as Forms W-2 or Form 1099, don't match the information reported.
  • Related examinations — returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.

Avoid getting audited. Here are a few red flags you should watch out for:

1. Making mistakes
Even if you do so by accident, errors on your tax return will give the IRS pause.Putting down the wrong Social Security Number and calculating something incorrectly are common mistakes that might cause the IRS to take a second look.Be sure that you enter the correct information and double check everything.

2. Incomplete information
It's easy to make mistakes on your return if you're filling it out yourself. And one mistake that will raise a red flag for the IRS is if your return is missing information. The IRS might wonder what other information is missing and audit you.

3. High income
If you make more than $200,000 your chances of being audited increase, a recent report on the IRS' enforcement activity said. People with incomes of $200,000 or more had an audit rate of 3.7 percent. That's about one out of every 27 returns. And the more you earn, the more likely you will be audited.

4. Being too charitable
Giving or donating to charity is commendable, but don't over-exaggerate how much you give. The IRS is aware of how much people around your income level donate, so if you report giving away much more you're going to raise some eyebrows.

5. Not reporting all taxable income
You must report all 1099 and W-2 forms. Remember, the IRS gets copies of everything you receive. Failure to report all your taxable income may cause red flags.

6. Excessive deductions
By all means, deduct everything you're allowed to. But don't overstate your deductions or lie about them. The IRS is well aware of what is outside the norm for people at your income level.

7. Home office deductions
Be careful about deducting for having a home office. As we mentioned, deductions raise eyebrows. To qualify for this deduction, your home office space must be used exclusively as your place of business. If you're entitled to the deduction, take it — but be prepared to prove that you regularly use the space for your business. And be sure to only deduct items that were used for your business.

8. Owning a small business
If your business runs mostly on cash or cash incentives — you're a taxi driver, car washer, work in a hair salon or bar — you're more likely to get audited.Workers in these professions tend to not accurately report all of their taxable income, like the amount of tips earned. If you are the owner a small business, be sure to report all the income you've received to avoid getting audited. Don't push the envelope. Also, don't try to pass off a hobby as a business just to try to get a deduction.

9. Not reporting a foreign bank account
Foreign bank accounts have come under increasing scrutiny in the last few years. The IRS has actively tried to get foreign banks to disclose account information and launched initiatives encouraging tax evaders to come clean. If you've got a foreign bank account and fail to report it, you could face severe penalties if the IRS finds out.

10. Not filing
Clearly you're asking to be audited if you've filed returns in the past, but stop doing so. Maybe you are unsure of how you will pay your tax bill, but you'll be charged with late payment penalties if you miss the filing deadline. And you could get into even more financial trouble if you're identified as a non-filer.

If you do pull a fast one of the IRS, think twice before you brag about it. Many cases start out with a whistleblower reporting how you failed to pay the taxes you owed. Why? Because the IRS offers a reward of up to 30 percent on the additional tax, penalty and other amounts it collects from the tax evader.

If you are audited, you'll be notified by mail or telephone — not email. The length of the audit will depend on its type, the complexity of items being reviewed, the availability of information being requested, the availability of both parties for scheduling of meetings and your agreement or disagreement with the findings. If you are audited, know that you do have rights:

  • A right to professional and courteous treatment by IRS employees.
  • A right to privacy and confidentiality about tax matters.
  • A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
  • A right to representation, by oneself or an authorized representative.
  • A right to appeal disagreements, both within the IRS and before the courts.

For more information on what to expect if you're audited, visit the IRS website .

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Read/Post Comments (16) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2014, at 2:07 PM, RealAmerican wrote:

    Other red flags for the IRS are being an outspoken critic of the Obama administration and having anything to do with a TEA Part group.

  • Report this Comment On February 16, 2014, at 2:22 PM, Kngrthr wrote:

    Doesn't matter, the irs is corrupt, they get anybody anytime they want and we are the pawns in the equation, Long live America, Oh crap, too late.

  • Report this Comment On February 16, 2014, at 2:51 PM, rukidnme wrote:

    So we actually have the right to courteous treatment by IRS employees? Really? The one time I had to go into their office to dispute something I was treated so incredibly badly (condescendingly and rudely.) And they had that armed guard standing there glaring at you-daring you to say something. that's how they do things here in Las Vegas at the local IRS. Disgusting, sad and sickening, huh?

  • Report this Comment On February 16, 2014, at 3:00 PM, GuitarJim wrote:

    Most of the "red flags" in this list would be caught by any decent tax prep software. Both HR Block and Turbo Tax have very good built-in audit analysis that will tell you if your odds of being audited are higher than they should be. Of course, this presumes you're not lying or withholding information from the tax software.

    Also, documentation errors that would result in you owing less tax or getting a bigger refund will usually NOT trigger an audit. For example, if you get a 1098 for deductible mortgage interest, and then fail to take the deduction, they won't audit you for that.

    @rukidnme, I've never had to appear in an IRS office, but I've dealt with them over the phone at least a dozen times. Half of those encounters were because I didn't file a return for several years. The agents I spoke with were courteous and genuinely did what they could to help me get out of the mess I'd made. This was back in the early 90's. Don't know if things have changed since then, or if your experience is unique to the Las Vegas office.

  • Report this Comment On February 16, 2014, at 3:06 PM, richr wrote:

    Red flaged by NSA.

  • Report this Comment On February 16, 2014, at 3:14 PM, Homecooken wrote:

    10 IRS Audit Red Flags: Be a republican.

  • Report this Comment On February 16, 2014, at 4:01 PM, christian1269 wrote:

    Best way to avoid an audit, be an illegal alien from Mexico or Tanzania, and never file tax forms. That seems to work under our current president. 30 million illegals and few file tax returns. Only American citizens are imprisoned for failure to file. Democrats like illegal aliens, not American citizens. When they talk about amnesty, they never seem to mention how it applies to failure to pay taxes and failure to file tax returns for decades, in the case of illegal aliens. Americans go to jail. For the same crimes, Mexicans go free. Our IRS tax dollars at work.

  • Report this Comment On February 16, 2014, at 4:15 PM, marcusparcus wrote:

    End the IRS once and for all by getting your congressman to support the Fairtax. It replaces all forms of income taxes with a single, transparent consumption (national sales) tax on new only goods and services at the retail cash register. No more filing taxes. No more audits. No withholding of Federal taxes from our paychecks. HR25 currently has more co-sponsors than any other tax bill. It is the ONLY tax bill developed by leading economists and NOT government bureaucrats or lobbyists. Go to the web site and find out how YOU can help make this happen.

  • Report this Comment On February 16, 2014, at 6:39 PM, ImtheBaldEagle wrote:

    The number one red flag is "is this person a conservative?"

  • Report this Comment On February 16, 2014, at 8:10 PM, jimmyers1 wrote:

    Being a conservative, supporter of Israel, anti-Obama and/or any of his policies or a supporter of a Republican. That's a sure way to get audited.

  • Report this Comment On February 17, 2014, at 9:39 AM, zedblade wrote:

    Well I had 1, 5, 6, 7, 8, and 10 - I was indeed audited :) I'm much more careful now!

  • Report this Comment On February 17, 2014, at 11:04 AM, SeanJapan wrote:

    I didn't get audited but had a problem one year that I made a mistake filing my federal return. It took FOREVER to fix it. At least 10 calls and 4 hours of my time talking to brain donors.

    Here in Japan filing is so much simpler, you can even go to the tax office and a very polite Japanese tax collector will help you file and send you on your way, imagine that?

  • Report this Comment On February 17, 2014, at 1:43 PM, ihatetheirs wrote:

    All one has to do when they get summoned for an audit is to ask the IRS if you are suspect in a tax crime. If so, ask them to get a warrant to search your personal property (your financial records are personal property) and you will happily comply. If you are not a suspect, tell them to hit the road.

    Random audits are a violation of the 4th and 5th Amendment, just as a random search of your home by the the police would be a violation of said Amendments.

  • Report this Comment On February 19, 2014, at 12:05 AM, TrumanTrout wrote:

    With all the IRS bashing here, I feel compelled to come to its defense. In view of the fact that the federal deficit is a significant problem, it seems logical to me that a strong but fair IRS audit function is necessary. This might not be needed if we lived in a world where the likes of Newt Gingrich and John Edwards didn't evade taxes with S Corporations and Mitt Romney could show what he's done without embarrassment. When leaders who voluntarily put themselves into the public spotlight behave like this, the IRS clearly needs more power to root out those who cheat in the dark. We need both changes in tax laws to close loopholes and stronger enforcement to discourage evasion.

    Truman Trout

  • Report this Comment On February 19, 2014, at 10:30 AM, farlberg wrote:

    The IRS audited me twice in 5 years, back in the 1990's because I made a mistake in addition or switched two digits. Admittedly, my mistake before I started using TurboTax.

    Then, in 2004, a California Franchise Board auditor called me threatening an audit because my mortgage payments were greater than my income. He was rude with his accusations that I had "apparently lied on my return." I sarcastically said, "Audit me. I dare you! I think you will find I have a lot more in savings than YOU apparently do... " (I was not audited that year.)

    Now, under Obama, the IRS seems to be one of his avenues of control. I think they need to eliminate the IRS and use some other tax system.

  • Report this Comment On February 19, 2014, at 8:26 PM, malclave wrote:

    "it seems logical to me that a strong but fair IRS audit function is necessary."

    That would be nice. What we have instead is an IRS that functions as a branch of the Democrat Party.

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