The thought of getting audited by the IRS has terrified many individuals. But over the years, the number of employees at the IRS has continued to decline and the result has been a reduction in audits of individual tax returns to 0.45% (compared to 0.9% five years ago). That being said, the below indicators can raise unwanted attention.

  1. Reporting low income. Data has shown that earning less than $25,000 per year can actually increase the chances of an audit. This is due to the IRS looking at the Earned Income Tax Credit, which can often have errors and is worth up to $6,600 for certain taxpayers.
  1. Large charitable deductions. The IRS knows the average deductions taken by certain income groups. If a large charitable deduction is claimed on your return, you should keep detailed records to support the amount.
  1. Writing off hobby losses. If you have multiple years of Schedule C losses along with income from other sources (whether wages or a different business) there is a higher chance the IRS will question if the activity meets the criteria of a trade or business under the tax definition.
  1. Failing to claim gambling winnings or claiming big gambling losses. Many casinos now issue the Form W-2G to winners. This information is also sent to the IRS and is an easy target when unreported. Losses are deductible to the extent of winnings, but large losses in a single year can trigger a notice from the IRS. Support for those loses should be kept in case the amount is questioned.
  1. Owning virtual currency. The IRS has begun to crack down on unreported gains from owning and selling Bitcoin and other virtual currencies. Detailed records need to be kept for all purchases, sales and other transactions. Even if it is being used to pay for goods/services, a taxable event may have been triggered.

Overall, an IRS audit is not a likely outcome for most individuals. And even if a deduction type is a “red flag”, you should not be afraid to take it if it can be legitimately claimed on your return. Properly supported items can easily deflect an IRS inquiry.

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If you want more information on audit chance or need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612 or contact us online.