Red Flags That Can Trigger a Tax Audit

Tax audits can be a daunting experience for individuals and businesses alike. The thought of being scrutinized by the IRS can be anxiety-inducing, but there are steps you can take to minimize the likelihood of being audited. As experienced CPAs, we’ve seen our fair share of tax audits and have identified some common red flags that can trigger an audit. By being aware of these red flags and taking proactive steps to address them, you can reduce your risk of being audited.

Red Flags Potentially Triggering an Audit

One of the biggest red flags that can trigger an audit is discrepancies between your reported income and the information the IRS has on file. This can include discrepancies in the amounts reported on your W-2s, 1099s, and other tax forms. Make sure to carefully review all of your tax documents before filing your return to ensure that all income is accurately reported. If you receive a corrected tax form after filing your return, be sure to file an amended return to avoid any discrepancies that could raise a red flag.

Another red flag that can trigger an audit is claiming excessive deductions or credits. While it’s important to take advantage of all available deductions and credits, claiming too many can raise suspicion with the IRS. Be sure to keep detailed records and documentation for all deductions and credits claimed on your tax return. If you claiming a deduction that is out of the ordinary, such as a large charitable donation or business expense, prepare to provide documentation to support your claim in the event of an audit.

Failing to report income from foreign bank accounts or investments is another one of the common red flags that can trigger an audit. The IRS has cracked down on offshore tax evasion in recent years, so it’s important to accurately report all income from foreign sources on your tax return. If you have foreign bank accounts or investments, be sure to report them on the appropriate forms. These forms include the FBAR (Foreign Bank Account Report) or FATCA (Foreign Account Tax Compliance Act) forms.

Lastly, inconsistencies in your tax return can also raise red flags with the IRS. This can include discrepancies in the information reported on different schedules or forms. Or it may include discrepancies between your tax return and other financial documents, such as bank statements or payroll records. Be sure to carefully review your tax return for any inconsistencies before filing. Take time to address any discrepancies with your CPA to avoid triggering an audit.

An Audit Doesn’t Mean You Did Anything Wrong

While these red flags can increase your risk of an audit, it’s important to remember that an audit doesn’t necessarily mean that you’ve done anything wrong. In many cases, audits are random or triggered by automated systems that flag certain discrepancies. Be proactive and take steps to address potential red flags before filing your tax return, so you can reduce your risk of the dreaded audit. You can also ensure that your tax return is accurate and in compliance with IRS regulations.

At our accounting firm, we understand the complexities of the tax system. We are here to help you navigate the audit process. If you have concerns about potential red flags on your tax return or are facing an audit, don’t hesitate to reach out to our team of experienced CPAs for guidance and support. We’re here to help you achieve compliance with the IRS and minimize your risk of an audit.