Common red flags that trigger IRS audits

On Behalf of | Nov 2, 2021 | Tax Law |

Statistics show that the IRS audits one out of 250 returns. Most audits happen for a reason and involve unintentional mistakes, but it helps Texas taxpayers to know what may trigger the IRS to audit a return.

Reasons for personal audits

Tax law allows taxpayers to take charitable deductions, but too many, non-qualifying deductions or a large amount may raise a red flag. Non-cash items should not exceed $500, and charitable deductions should not exceed 50% of AGI income for all public charities. It must be a qualified organization, such as a synagogue or community chest, but some charities are limited to 20% and 30%.

Another trigger that may cause an audit is unreported or underreported income, which commonly occurs in cash jobs. The IRS probably already knows if the employer filed a 1099, so the government will compare it to the W2 that the employee sends or look for unreported bank deposits.

Sometimes, if a taxpayer has a huge jump in income, this may raise the suspicions of the IRS. According to 2019 statistics, taxpayers making between $200,000 and $1 million had more of an audit risk, which was 1%.

Reasons for business audits

Some self-employed people mistakenly claim too many business deductions, often for unnecessary business expenses such as personal meals. If the taxpayer takes a client for a business lunch or travels to meet them for business, then the deduction is commonly allowed. The taxpayer needs to present receipts or provide the IRS other proof that they can legally claim the expense.

Many business audits are conducted because of an employer not filing payroll taxes or not counting freelancers to save taxes. IRS auditors know to look for business owners claiming 100% business use for their personal vehicle, which will likely cause investigations.

While audit chances are slim, taxpayers should carefully review their returns, and it’s recommended to enlist professional tax help for complicated returns. If a taxpayer avoids paying taxes altogether, they could face tax evasion charges.