Top 4 Red Flags That Trigger an IRS Audit (2024)

Key Takeaways

• The IRS uses a combination of automated and human processes to select which tax returns to audit.
• Not reporting all of your income is an easy-to-avoid red flag that can lead to an audit.
• Taking excessive business tax deductions and mixing business and personal expenses can lead to an audit.
• The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.

1. Not reporting all of your income

Unreported income is perhaps the easiest-to-avoid red flag and, by the same token, the easiest to overlook. Any institution that distributes an individual’s income will report it to the IRS, and the more income sources you have, the greater the difficulty in keeping track.

Old brokerage accounts are commonly overlooked, as are Form 1099s and distributions from a college savings account to pay tuition.

• 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 the rules on foreign accounts

The Foreign Account Tax Compliance Act has strict reporting requirements for foreign bank accounts.

• The law requires overseas banks to identify American asset holders and provide information to the IRS.
• Individuals are required to report foreign assets worth at least $50,000 on the new Form 8938.

It used to be you didn’t have to report it; you just had to check a box that you had one. Now you have to not only check the box, you have to identify the institution and the highest dollar amount the account was at the previous year.

The regulations demand openness, which in turn increases the likelihood of an audit. That’s because of a perception that taxpayers with foreign accounts are trying to hide income offshore.

• But it’s a Catch-22: Compliance with the law increases the likelihood of an audit, and noncompliance can result in stiff penalties and significant legal liabilities.

3. Blurring the lines on business expenses

The IRS will give a close look to excessive business tax deductions.

• 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.

Generally speaking, the IRS can be strict about mixing business and personal expenses. Business meals can be allowable, but exceeding the occupational norm by a great amount invites an audit. Business meals oftentimes can be a blurred line, so be sure to document what is and isn't a personal expense.

TurboTax Tip:

Individuals must report foreign assets worth at least $50,000 on the new Form 8938. Failing to report foreign assets can lead to an audit.

4. Earning more than $200,000

Last year the IRS audited about 1% of those earning less than $200,000, and almost 4% of those earning more, according IRS data.Raise the threshold to $1 million and the percentage of audited tax returns increases to 12.5%.

The same patterns exist when it comes to business tax returns: 1% of corporations with less than $10 million in assets, compared with 17.6% above that threshold.

Higher incomes are likely to result in more complex tax returns that are more likely to contain audit triggers. More importantly, the IRS wants to maximize return on investment, something the agency gets better at every year:

• $55.2 billion was collected through enforcement activities last year, a 63.8% increase since 2001 without adjusting for inflation.
• But enforcement personnel increased only 9.8% during that time.

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