Navigating tax season can feel daunting, especially with the looming possibility of an IRS audit. While most taxpayers won't face one, knowing what triggers red flags in tax returns can help you file confidently. This blog will explain the common factors that attract IRS scrutiny and provide practical tips to avoid falling into this category. Equipped with this knowledge, you'll be better prepared to file your taxes accurately and avoid unnecessary headaches.

What Triggers an IRS Audit?

The IRS doesn't randomly select tax returns to audit. They use algorithms and data analytics to identify discrepancies, unusual income patterns, or deductions that don't align with the average taxpayer profile. Here are the key factors that draw their attention:

1. High Income Levels 

Making more money is a good thing, but it can also make you more visible to the IRS. People who earn $200,000 or more annually are more likely to face an audit than those in lower income brackets. 

With greater income comes more deductions and potential errors, which can look suspicious if not well-documented.

How to avoid issues: 

Keep detailed records of all earnings, including freelance or side gig income. Make sure your deductions align with your income level.

2. Math Errors or Typos 

Simple mistakes like incorrect addition, transposed numbers, or mismatched Social Security Numbers can trigger further IRS examinations. These are easy to avoid but remain one of the most common red flags.

How to avoid issues: 

Double-check your math, and consider using reputable tax software or services like Sela Tax for accurate calculations.

3. Excessive Deductions 

Claiming significant deductions that are disproportionate to your income might make the IRS skeptical. For example, if you're reporting $50,000 in income and $30,000 in charitable donations, this may flag your return.

How to avoid issues: 

Ensure your deductions are reasonable and backed by receipts or documentation. Don't claim deductions you can't substantiate.

4. Home Office Deduction 

The home office deduction is a frequent audit trigger, especially if you're stretching its definition. Deducting excessive square footage or claiming it for non-business activities can raise eyebrows.

How to avoid issues: 

Ensure your home office is exclusively used for business purposes and calculate the deduction according to IRS guidelines.

5. Cash-Based Businesses 

If you run a business that primarily deals in cash, like a restaurant or salon, the IRS may take a closer look at your returns. Cash-based businesses are often flagged for potential underreporting of income.

How to avoid issues: 

Use reliable accounting software to track income and expenses. Maintain detailed records, and deposit cash income into a business bank account.

6. Unrealistic Losses 

Reporting losses year after year, particularly for activities categorized as hobbies, can make the IRS question whether it’s a legitimate business or just an attempt to offset other income.

How to avoid issues: 

Ensure your business activities and expenses are reasonable and show efforts to make a profit.

7. Large Cash Transactions 

If you deposit or withdraw large sums of cash (over $10,000), your bank is required to report this to the IRS. Repeated large transactions could invite scrutiny.

How to avoid issues: 

Maintain detailed records of all large transactions and explain their purpose if necessary.

8. Foreign Accounts 

If you have money in accounts outside the U.S., failing to report these properly can lead to an audit. The IRS closely monitors foreign income and accounts through FATCA (Foreign Account Tax Compliance Act).

How to avoid issues: 

Report all foreign accounts and income accurately on your tax return and necessary forms, such as the Report of Foreign Bank and Financial Accounts (FBAR).

9. Claiming Rental Losses 

Renting out properties comes with tax benefits, but claiming rental losses excessively, especially as a passive investor, can make the IRS suspicious.

How to avoid issues: 

Clearly identify whether you're an active participant in managing your rental properties, and ensure all deductions are within IRS limits.

10. Misclassifying Workers 

If you own a business and misclassify employees as independent contractors, it can lead to hefty fines and draw IRS attention.

How to avoid issues: 

Understand IRS guidelines for classifying workers. If in doubt, consult with a tax expert like Sela Tax.

Tips to Avoid an IRS Audit

Now that you know what causes red flags, here’s how to safeguard yourself against an audit:

1. File Accurately and On Time 

Filing accurately and meeting deadlines is the first step in avoiding unnecessary scrutiny. If you're unsure about any aspect of your tax return, seek help from professionals like Sela Tax.

2. Report All Income 

No matter how small, report all sources of income, including freelance or gig work. Cross-check tax forms like W-2s and 1099s with your own records to ensure completeness.

3. Keep Organized Records 

Retain records for at least three years after filing. Keep receipts, invoices, bank statements, and documentation for deductions and credits claimed.

4. Use Trusted Tax Software or Professionals 

Tax preparation software can minimize calculation errors and flag potential issues. Alternatively, working with trusted tax consultants like Sela Tax ensures compliance and accuracy.

5. Be Honest 

Avoid exaggerations or misrepresentations. The risk of penalties and audits far outweighs any short-term gain from inflating deductions or underreporting income.

6. Review Your Return Before Filing 

Set aside time to review your tax return thoroughly. Look for typos, missed income, or discrepancies in deductions that might raise questions.

When to Seek Professional Help

If you feel overwhelmed by the complexity of your taxes or have unique circumstances (like foreign income, business ownership, or rental properties), professional assistance can be invaluable. Experts like Sela Tax bring a wealth of knowledge and tools to ensure your return is accurate, fully compliant, and maximized to your benefit.

Stay Audit-Free with Confidence

Although most audits are rare, understanding the red flags and taking steps to file accurately can significantly reduce your chances of becoming one of the unlucky few. Proper documentation, honesty, and attention to detail will go a long way in keeping your IRS filings smooth and stress-free. And when in doubt, Sela Tax is here to help.

Take the guesswork out of tax season by scheduling a free consultation with Sela Tax today.Filing taxes doesn’t have to be a source of anxiety—with the right support, it can even become routine.