Red Flags That Trigger an IRS Audit
- Brian Yeung
- Feb 27, 2020
- 2 min read
Audit is a scary word...and nobody wants to get audited. So here is a little background on how the IRS operates to determine which tax returns to audit and a few items that draw extra attention.
The IRS uses a combo of automated and human processes to figure out which returns need further attention. All information is compared with documentation received (i.e. your W-2 or 1099 that the IRS receives as a copy) and also compared to statistics or averages to see if anything is outside the norm. Any anomalies typically undergo several layers of review by IRS staff.
Audits then occur either by mail or physical meetings (typically at taxpayer's location).
Certain red flags draw attention. They are:
1. Not reporting all your income
The IRS will typically receive a copy of all the tax forms that you do, including distributed income.
The IRS will match the reported items to a person’s return. If they see something missing, they will automatically conduct at least a letter audit.
2. Breaking rules on foreign accounts
The law requires overseas banks to identify American asset holders and provide information to the IRS.
Individuals must report foreign assets worth at least $50,000 on the new Form 8938.
3. Blurring the lines on business expenses
The agency uses occupational codes to measure typical amounts of travel by profession, and a tax return showing 20% or more above the norm might get a second look.
Also, take-home vehicles aren’t considered strictly business, so a specific purpose should accompany any vehicle-related deduction.
4. Earning more than $200k.
In 2019 IRS audited 1% of taxpayers earning less than $200k. 4% earning more than $200k and 12.5% for over $1 million.
Business tax returns: 1% of corporations with less than $10 million in assets. 17.6% above $10 million
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