What red flags often trigger an IRS audit?

Receiving an audit notice could prove unsettling, but many taxpayers find such letters in the mail each year. While numerous Texas residents file federal returns year after year with no problems, others wonder why the IRS continues to look closely at their submissions. Sometimes, the IRS picks up on specific “red flags” when processing a return. Taxpayers may find value in learning about the typical items that IRS examiners may notice.

Items that may trigger an audit

While not every self-employed or wealthy person faces an audit, many do. A person filing a Schedule C form indicating profits/losses and deductions for the self-employed may face more scrutiny. The IRS may wonder if certain deductions are legitimate and whether the taxpayer can substantiate them. A wealthy person could employ several tactics to lower tax debt, and the IRS might question such things as charitable deductions.

And then there are somewhat unfortunate mistakes. Sloppy returns, ones with handwritten figures or math errors, may raise alarms. Some taxpayers forget about some income they earned, so they don’t report it. Financial information submitted to the IRS might reveal underreported income, triggering an audit.

People who handle large sums of cash may raise suspicions. Certain businesses, such as restaurants or grocery stores, might have many customers paying cash. The IRS could wonder if all the money appears reported on the tax return.

Dealing with an audit

While receiving an audit notice may frighten someone, taxpayers have rights. IRS audit defense and appeals steps could work out in the taxpayer’s favor. For example, the IRS may claim specific business deductions are personal expenses. The taxpayer might provide concrete evidence that supports the deduction. The IRS may accept the response and conclude the audit.

Issues surrounding an audit may require appeals or appearances in Tax Court. In some cases, the taxpayer may win out over the agency.