Common IRS Audit Red Flags

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   1. Failure to report all taxable income: The IRS receives copies of all 1099s and W-2s that you receive during a year, so make sure that you report all required income on your tax return.

   2. Math errors: One of the biggest reasons that people receive a letter from the IRS is because of mathematical mistakes they make on their tax returns.

   3. Returns claiming the home-buyer credit: First-time home buyers and longtime homeowners who claimed the home buyer credit should be prepared for IRS scrutiny.

   4. Taking higher-than-average deductions: If deductions on your return are disproportionately large compared to your income, the IRS audit formulas take this into account when selecting returns for examination.

   5. Claiming large charitable deductions: This comes up again and again because the IRS has found abuse on audit, especially with those taking larger deductions.

   6. Engaging in currency transactions: The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious activity reports from banks and disclosures of foreign accounts.

   7. Home office deduction: The IRS is always very interested in this deduction, primarily because it has a pretty high adjustment rate on audit.

   8. Failure to report a foreign bank account: The IRS is intensely interested in people with offshore accounts, especially those in tax havens.

   9. Business meals, travel and entertainment: Schedule C is critically examined by the IRS agents

  10. Cash businesses: Small business owners, especially those in cash-intensive businesses. Example: Taxi drivers, car washes, bars, hair & nail salons, restaurants and etc. are an easy target for IRS auditors.

  11. Claiming 100% business use of vehicle: Claiming 100% business use for an automobile on Schedule C is  surely questioned by IRS agents.

  12. Claiming a loss for a hobby activity: If your Schedule C loss-generating activity sounds like a hobby.

  13. Rental losses: Rental losses are subject to a number of complex rules. Therefore, these taxpayers should expect their tax returns to be highly scrutinized and probably audited.

  14. Unusual jump in income: Excessively higher or lower income compared to the previous year.

  15. Dependency: You are claiming several dependents on your return, or dependents belong to others in previous years.


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