IRS Red Flags: How to Avoid a Tax Audit
1. Report All Income
Failing to report income is one of the most common triggers for an audit. The IRS receives copies of income forms such as:
• W-2s: For salaried or hourly employees.
• 1099 Forms: For freelancers, gig workers, and contractors.
• 1099-B: For stock and investment sales.
Ensure your reported income matches the forms sent to the IRS. Even small discrepancies can raise suspicion.
2. Avoid Excessive Deductions
While deductions are a legitimate way to reduce taxable income, claiming unusually large deductions compared to your income can attract attention. Examples include:
• Charitable Donations: If you claim high donations relative to your income, ensure you have proper receipts and documentation.
• Business Expenses: If you’re self-employed, large home office or travel deductions may be questioned.
3. Be Cautious with Cash Transactions
Frequent or large cash transactions, particularly for small businesses, can draw scrutiny. Keep meticulous records, including receipts and invoices, to substantiate all cash income and expenses.
4. Correctly Classify Workers
If you own a business, misclassifying employees as independent contractors to avoid payroll taxes can lead to penalties. Use IRS guidelines to ensure proper classification.
5. Watch Out for Math Errors
Simple errors, like miscalculations or transposing numbers, can trigger an audit. Double-check all entries or use tax software to minimize mistakes.
6. File on Time
Filing late or requesting excessive extensions can increase the likelihood of a closer review. Make sure you submit your return and any payments by the April 15 deadline (or the adjusted date for 2025).
7. Be Transparent with Cryptocurrency
If you’ve traded, sold, or earned cryptocurrency, the IRS requires you to report it. Cryptocurrency income is a key focus area for audits, so ensure accurate reporting.
8. Claim Dependents Correctly
Only one taxpayer can claim a dependent per year. If multiple individuals (e.g., divorced parents) attempt to claim the same dependent, the IRS may flag both returns.
9. Maintain Records for Large Deductions
High-value claims, such as casualty losses or large medical expenses, require proper documentation. Keep receipts, bank statements, and any relevant legal documents on file for at least three years.
10. Avoid Round Numbers
Round numbers on deductions (e.g., exactly $2,000 for office supplies) may look suspicious. Report actual amounts to the penny to avoid scrutiny.
Why Tax Audits Happen
The IRS aims to ensure taxpayers comply with tax laws and pay the correct amount of taxes. However, audits are rare and usually target:
• High-income earners.
• Small businesses with complex returns.
• Returns showing significant anomalies.
How to Stay Prepared
At iMinds Financial, we focus on accuracy, compliance, and detailed recordkeeping to minimize audit risk. If the IRS contacts you, we can guide you on how to respond and provide
consultation for your case.
Have questions about audit risks? Contact iMinds Financial for expert advice and peace of mind during tax season.
