Filing taxes is a routine, albeit complex, task that many of us approach with a mix of caution and anticipation. It's an essential part of financial responsibility, yet it carries the daunting possibility of an audit by the Internal Revenue Service (IRS). While the odds of being audited are relatively low, certain factors can increase your chances of attracting the IRS's attention.
Here are six potential red flags that could make your tax return more susceptible to an audit.
1. High Income
It's not unusual to worry about audits, especially as your income rises. Statistically, those earning between $1 million and $15 million have a higher chance of being audited. It’s just the IRS’s way of being extra careful with returns that have more at stake.
2. Unusual Deductions
The IRS compares your return to others in similar income brackets and professions. If your deductions or expenses are far outside the average, it could raise eyebrows. For example, if you're a freelance graphic designer claiming $30,000 in travel expenses on $50,000 of income, that’s likely to stand out. Benchmark your deductions against industry norms and be prepared to justify any outliers
3. Businesses That Look More Like Hobbies
Running a business that consistently loses money can be a red flag—especially if it resembles a hobby (think photography, horse breeding, or crafting). The IRS expects a legitimate business to show a profit in at least three of five consecutive years. To stay compliant, you should keep detailed records, maintain a business plan, and separate personal and business finances to demonstrate that your venture is a real business.
4. Unreported Income
The IRS gets income reports from various sources, so if there's a mismatch with what you report, it could raise a red flag. Ensuring all your income is accurately reported, including freelance work, helps prevent this.
4. Discrepancies with Ex-Spouses
When divorced spouses report different information—such as who is claiming a child as a dependent or who is deducting alimony—it can trigger an audit. The IRS cross-checks returns, and mismatches are easy to spot. Clear communication here is key, so you should coordinate with your ex-spouse (if possible) and ensure that your divorce decree clearly outlines tax responsibilities.
5. Rental Property Losses
Rental properties come with specific tax rules. Losses can usually only be deducted if you actively manage the property or qualify as a real estate professional. Keeping thorough records can help substantiate your claims. Remember to report all rental income, even from short-term rentals like Airbnb. Understand the rules around depreciation, repairs vs. improvements, and passive loss limitations.
Final Thoughts
While being audited doesn’t necessarily mean you’ve done something wrong, it can be time-consuming and stressful. The best defense? File an accurate return, keep meticulous records, and when in doubt, consult a tax professional.
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.