Top 40 Red Flags for the IRS

It’s a fact: some people are more likely to get audited than others. While an IRS audit is not always avoidable, there are some common factors to look out for that make you more likely to get their attention. Here’s our list of the Top 40 Red Flags for the IRS.

  1. Donating a lot of money to charity (disproportionate from your income)
  2. Deducting unreimbursed business expenses (do you really only use that computer for work?)
  3. Having a lot of money: the IRS will target those with an income above $200,000 (If your income is over $200,000 you have a 1 in 59 chance of being audited, over $1M in income is a 1 in 17 chance)
  4. Not reporting rental income from home hosting (for example, VRBO or Airbnb)
  5. Claiming day-trading losses on Schedule C
  6. Claiming rental or other passive activity losses
  7. Deducting business meals, travel and entertainment (in excessive amounts or within an industry that does not generally require such expenses)
  8. Claiming 100% business use of a vehicle
  9. Writing off a loss for a hobby (such as a winery or other “hobby” that might be making an income)
  10. Taking an alimony deduction
  11. Claiming a home office deduction (should you take advantage of the simplified method?)
  12. Running a business in which almost all the money is in cash
  13. Engaging in currency transactions
  14. Not properly reporting income from crowdfunding (such as Kickstarter or GoFundMe)
  15. Taking higher than average deductions or a significant increase to deductions (make sure to have proper documentation!)
  16. Reporting a Net Operating Loss (NOL)
  17. Being self-employed or running a small business (document, document, document)
  18. Taking an early payout or loan from a 401(k) or IRA account
  19. Failing to claim large gambling winnings
  20. Claiming large gambling losses
  21. Claiming the foreign earned income exclusion
  22. Not reporting income from ride sharing services (such as Uber and Lyft)
  23. Not including all required attachments when filing your tax return
  24. Renting a residential property for under fair market value
  25. Typos or entry errors (human error happens, but don’t let it happen on your taxes)
  26. Filing a paper tax return (heightens the risk of illegible handwriting and paper returns have a 21% error rate)
  27. Receiving the EITC and/or have no adjusting gross income
  28. Failing to include income reported on Form 1099-MISC (keep in mind the accelerated deadline!)
  29. The numbers look “too perfect,” such as perfectly round numbers
  30. Overvaluing donation items (a $2,000 sofa…are you sure?)
  31. Failure to sign the return (the most simple, yet vastly common mistake)
  32. Investing in a partnership, LLC, or corporation
  33. Deferring recognition of gains through a 1031 exchange
  34. Excluding capital gains from small business stock under Section 1202
  35. Failure to reconcile advance payments of the premium tax credit reported on Form 1095-A
  36. Discrepancies between W2/1099 forms and reported income (these “matching” errors are easily caught by IRS)
  37. Multiple deductions claimed for children (only one parent can claim child-related tax benefits for a child)
  38. Having multiple years of business losses (the IRS uses a “three year rule” to test legitimacy of side businesses and assess whether the taxpayer is indeed pursuing a for-profit business)
  39. Claiming a credit for residential energy efficient property or qualified energy efficiency improvements
  40. Consistently underpaying taxes over the years

While some red flags are caused by human error, others are unavoidable. It’s important to always keep good records and stay on top of current compliance rules and updates. If you have any questions or want to learn more about what might be a red flag for the IRS, please reach out to us at info@ssfllp.com or at 925.271.8700.