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5 Red Flags That Will Trigger IRS Scrutiny

The idea of being audited by the IRS is a frightening one for many taxpayers. In most cases, there is no cause for concern unless something about your financial situation places you in a category where the IRS thinks you may owe them more than you say you do. Certain flags thrown up by IRS computer systems may trigger a review by human agents. 

1. Misreporting income

Not reporting all your income is one of the easiest red flags to avoid and yet it is probably also the easiest to overlook. The IRS has a computer system that’s designed to detect anomalies. 

The more income sources you have, the more difficulty you may have keeping track. You need to make sure that the income from W-2s and 1099s matches what you report on a return as any discrepancies will be found. 

The system will also detect any duplicate information, such as two people claiming the same dependent. It will also find deductions that don’t make sense. 

For instance, most people who earn $45,000 a year don’t give $35,000 of that money to a charity and claim a deduction for this. Fortress tax relief has expert tax attorneys who have experience in helping taxpayers to resolve their tax liabilities. 

2. Earning too much or too little

The IRS won’t waste time on an audit unless the agents are reasonably sure a taxpayer owes additional taxes. The focus is, therefore, on high-income earners. The IRS is more likely to audit returns of those with between $200,000 and $1 million in income and those earning over $1 million are even more of a target. 

Conversely, you also stand a higher chance of being audited if you use tax deductions to significantly reduce your income. If you report no adjusted gross income, you may find yourself under the IRS microscope. According to the statistics, the taxpayers who are audited the least fall into the $25,000 to $200,000 bracket. 

3. Spending or depositing a lot of cash

The IRS requires various businesses to report large cash transactions involving more than $10,000. The reason for this is to try and prevent illegal activities. 

One of the consequences is that the IRS will want to know where any large sum of cash came from, especially if your reported income doesn’t support it. When you file your tax return, you should be able to show how and why you received the cash. 

4. Claiming excessive home office expenses

It’s perfectly legitimate to claim home office expenses but they have to meet specific requirements. The IRS is aware that taxpayers who claim home office deductions may get the rules wrong, so this is an area where they can potentially make additional tax dollars. 

One of the ironclad rules is that a home office area has to be used exclusively for business. For example, if you’re an accountant and you use a den in your home to work on your clients’ financial statements but your family also uses the den for relaxation, you can’t claim a deduction for business use. 

5. Deducting too much when you’re self-employed

Freelancers and sole proprietors are entitled to deductions from their earnings to determine their taxable income. As they may be reducing their income tax by making deductions they aren’t entitled to, the IRS is on the lookout for those that are above the norm. 

For example, the IRS will look at the occupational codes that appear on your tax return. If you claim much more on travel expenses than the average for your profession, it could raise a red flag.