Five Tax Red Flags that Can Lead to an IRS Audit

Published at 2:00 am, February 4, 2015

EastIdahoNews.com Staff

iStock/Thinkstock(NEW YORK) — Nobody wants to be audited by the Internal Revenue Service, but many taxpayers make simple mistakes that can lead to one.

Many Americans will file their income tax return early before the April 15 deadline to receive their tax refund. Some IRS audits are randomly selected and based solely on a statistical formula, the IRS says, but other audits can happen when documents simply don’t add up.

Greg McBride, a chief financial analyst, says, “Common red flags for tax audits are high income, outsized deductions relative to income and national norms, unreported income such as investment returns, and losses from an activity viewed as a hobby more than a business. Also be sure that the numbers you’ve entered on your return are correct, as a typographical error could be enough to raise a red flag.”

Here are five common red flags that could lead to an audit:

1. High income

“There’s more room for fudging higher-income levels than lower-income levels,” McBride says. “Higher incomes are also in a higher tax bracket so there’s a greater temptation to cheat.”

2. Outsized deductions

Large deductions relative to one’s income and national norms could also raise red flags.

“It may defy common sense if, for example, someone is claiming a ton of mortgage interest on a very modest salary. Something there doesn’t quite match up,” McBride says.

Another example may be very large charitable deductions.

“A large number of charitable deductions on a modest income is definitely going to raise a red flag,” he says.

3. Unreported income

For people who may own stocks, an example of this could be dividend income or a capital gain that you forgot to report.

“You get your 1099 but that same information is also furnished to the IRS,” McBride says. “They’re matching your return and the information they have for you. If something’s missing, that’s going to raise a red flag.”

4. Hobby vs. business

Losses from an activity viewed as a hobby more than a business could also raise a red flag, McBride says.

This may happen if there’s actually no business model in place, but you’re claiming it for big losses or to deduct expenses.

5. Typos

McBride cautions filers to “be sure that the numbers you’ve entered on your return are correct, as a typographical error could be enough to raise a red flag.”

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