6 Red Flags That Can Trigger a Tax Audit

Consider yourself warned.

Maurie Backman
Maurie Backman
Mar 3, 2019 at 6:16AM
Investment Planning

Filing taxes can be a stressful process, especially if you're concerned about having yours audited. Now the truth is that less than 1% of all tax returns wind up getting further scrutinized, so statistically speaking, your chances of being audited are fairly low to begin with. These situations, however, might increase your chances of having your return flagged.

1. Earning a high income

Earning a decent living is a good thing, except for the fact that if your income exceeds a certain threshold, it might increase your audit risk. For the 2016 tax year, filers who earned between $1 and $499,999 had an audit rate of under 1%. But folks who earned between $1 million and $4.999 million had 3.52% of their returns audited.

Person holding magnifying glass over financial ledger

IMAGE SOURCE: GETTY IMAGES.

Super high earners had it even worse. Those reporting between $5 million and $9.999 million had an audit rate of 7.95%, while those making $10 million or more had a rate of 14.52%.

Now this isn't to say that you shouldn't go out and earn as much as you can. Just be aware that above a certain threshold, your risk does increase.

2. Earning no income

Just as the IRS tends to scrutinize tax returns that report high incomes, so too does the agency dig deeper when no income is reported. For the 2016 tax year, the audit rate among returns with no adjusted gross income (AGI) was 2.55%. If you're entitled to enough tax credits that put money back in your pocket, you might land in a situation where your AGI is whittled down to nothing, and so you shouldn't hesitate to claim them. Just be aware that the IRS might ask some questions about your return if you do.


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3. Deducting disproportionate business expenses

It often takes money to make money. But if you're self-employed and claim a large amount of expenses relative to your income, it could prompt the IRS to take a closer look. For example, it's not unusual to incur $8,000 in business expenses in the course of earning $80,000. But if you're claiming $60,000 in expenses to make $80,000, that's far more unusual. No matter what business expenses you're claiming, make sure they're well documented. That way, if the IRS comes knocking, you'll have proof to present.

4. Taking large charitable deductions

There's nothing wrong with being charitable and giving some of your hard-earned money away. But if you're generous to the point where it doesn't seem to make sense financially, the IRS is likely to take notice. Case in point: For the 2016 tax year, the average deduction for charity among earners with an AGI between $30,000 and $49,999 was $2,871. Therefore, if you report an AGI of $35,000 but claim $10,000 in charitable deductions, the IRS will probably question how it is you can afford to part with so much of your income -- and whether that figure is legitimate.

5. Claiming 100% business use of a vehicle

If you're self-employed and use your vehicle for work purposes, you're allowed to write off related expenses on your taxes. You can do so by taking a mileage deduction (where you get a preset amount per mile you drive for business reasons), or by claiming actual expenses relating to your vehicle, like auto insurance, maintenance, and repairs.

That said, if you use your vehicle for personal matters as well as business, you can only deduct a portion of these expenses. For example, if your vehicle is driven for personal use 60% of the time, and for work purposes the other 40% of the time, you only get to claim 40% of the aforementioned costs. Most folks can't legitimately claim that they use their vehicles solely for business purposes, and if you do, you might find yourself on the wrong end of an audit. The one exception might be if you work for a ride-sharing service like Uber or Lyft full-time. If that's the case, and you live in an area with public transportation, it's conceivable that you might never use your vehicle for non-work purposes.

6. Not reporting enough income to support your lifestyle

Claiming deductions that don't match your income is a great way to get the IRS to investigate. For example, if you're deducting interest on a $750,000 mortgage, but you report only $75,000 in income, the IRS is going to wonder how you're able to afford your house. And chances are, it'll go looking for income it thinks you're hiding.

Most filers would rather avoid a tax audit, so if you're one of them, be aware of these major warning signs. That said, don't panic if your return does get audited, provided everything you claimed was legitimate. Most of the time, all it takes is additional documentation to get the IRS off your back, and as long as you have it, you're golden.