IRS tax audit trigger points are a collection of probable reasons that invite IRS attention to your tax return. These are the most common reasons for selecting your tax return for deep examination.
1. Undisclosed income. The most significant IRS tax audit trigger point.
Since the IRS gets copies of all the 1099s and W-2s you receive, failing to report income on your tax return may trigger an audit by IRS. Trigger Number. One of the most common reasons for selecting your tax return is any discrepancy between your reported income and the information that IRS has already through various statutory reports and 1099 forms like 1099-MISC or 1099-K reporting side income or 1099-INT showing taxable interest. IRS matches the tax return data with their records gathered through various reporting rules. If there is a discrepancy, the IRS system will raise a red flag on your tax return. Those discrepancies that hint at undisclosed income alone will trigger an IRS audit letter.
IRS trigger points video
2. Taking Higher-than-Average Deductions, Losses or Credits
If the deductions, losses or credits on your return are disproportionately large compared with your income, the IRS may want to scrutinise your return. For example, you claim a significant loss from the sale of rental property or other investments or bad debts, which can also spike the IRS’s curiosity.
3 . Donating a conservation or façade Easement
If you’ve donated a conservation or façade easement to a charity, or if you are an investor in a partnership, LLC or trust that made such a donation to charity, chances are excellent that the IRS may choose to examine your tax return.
4. Certain Types of Business
If you are running certain types of Businesses, the chance of an IRS audit is higher! Sole proprietors reporting very high gross receipts on Schedule C and those running cash-intensive businesses like taxis, car washes, bars, hair salons, restaurants and the like have a higher chance of getting an IRS audit notice. Then, business owners who report substantial losses on Schedule C, primarily if those losses are used to adjust other income earned by taxpayers, are also on the radar of the IRS.
5. Claiming Rental Losses
One of the main doubts of the IRS about rental income is that people earning it often try to write off losses substantially more than they’re entitled to. Further, if your tax return shows loss from the rental of properties year after year, that also is a cause for the selection of your tax return for audit by the IRS. IRS invariably chooses to audit cases of claiming losses on rental properties, and they want to examine if the passive loss rules apply to them. The tax law on passive loss adjustments prevents the deduction of rental real estate losses, with two important exceptions.
1. You or your spouse can prove to be a real estate professional, or
2. Your income is small enough to use the $25,000 annual rental loss allowance.
6. Writing Off a Loss for a Hobby
If you report multiple years of losses on Schedule C of tax Form 1040, related to an activity that looks like a hobby and has lots of income from other sources, you will be a favourite target for IRS.
7 . Claiming 100% Business Use of a Vehicle
IRS targets business returns where the proprietor or business owner claims 100% business use of an automobile. The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. These vehicles are eligible for more favourable depreciation and expensing write-offs.
8. Claiming the American Opportunity Tax Credit
The AOTC (American Opportunity Tax Credit) is worth up to $2,500 per student for the first four years of college. IRS selects tax returns showing claims of AOTC credit to examine if the credit was claimed for more than four years for the same student.
9. Misreporting Health Premium Tax Credit
The premium tax credit helps individuals pay for health insurance they buy through the marketplace.
10. Withdrawal Out of IRA or 401(k) Account
The IRS wants to examine whether owners of traditional IRAs and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions.
11. Claiming Alimony Deduction
Tax Cuts & Jobs Act (TCJA) completely changed the tax deductibility of alimony payments and receipts. Now, alimony receipts are not taxable, and alimony payment is also not tax deductible. Therefore, if IRS sniffs alimony payments, IRS may conduct an audit to examine if you have claimed alimony write-offs as a deduction from taxable income.
12 . Failing to Report Gambling Winnings or Claiming Big Gambling Losses
Failure to report gambling winnings can draw IRS attention, mainly if the casino or other venue reported the amounts on Form W-2G. If you report significant losses on Schedule A from recreational gambling but aren’t including the winnings in income, you may invite the attention of the IRS.
13. Claiming Loss Adjustment on Marijuana Business
Federal tax law bars tax deductions related to any illegal business under federal law. The business of marijuana is not legal as per Federal law. So, The IRS is keeping a close eye on the tax returns of people carrying on legal marijuana firms that take improper write-offs on their returns.
14. Claiming Day-Trading Losses on Stocks
If you are not a day trader on stocks and buy and sell stocks as investments, your losses can not be classified as trade loss. But, you can classify that loss on stocks sale as an investment loss. Since the IRS believes that many tax filers who report trading losses or expenses on Schedule C are actually investors, they select their tax returns for an audit.
15. Taking the Research & Development Credit
IRS often selects those tax returns wherein they find the massive claim of Research and Development credit (R&D tax credit)to examine if the claim is genuine.
16. Cryptocurrency Transactions
It is no secret that crypto transactions often associates with money laundering and tax evasion stories. Therefore, the IRS is on the hunt for taxpayers who sell, receive, trade, or otherwise deal in bitcoin or other virtual currency and is using pretty much everything in its arsenal.
17. Engaging in Cash Transactions
Be prepared for IRS scrutiny if you make large cash purchases or deposits. Please note that Federal Law requires a person to file Form 8300 if they receive cash of more than $10,000 from the same payer or their agent. So, having a cash transaction, IRS gets info from the person who receives your cash.
18. Failing to Report a Foreign Bank Account.
There is a reporting rule about the bank account in a foreign country. For U.S. citizens living on U.S. soil, you must report it on Form 8938 as part of your tax return if the value of your overseas account’s assets was :
- more than $50,000 ($100,000 for married couples filing jointly) on the last day of the tax year, or
- more than $75,000 ($150,000 for married couples) at any time during the year,
Readers should note that the liability to report foreign accounts on Form 8938 differs from FBAR (Foreign Bank and Financial Accounts) reporting. Under FBAR reporting rules, US citizens with more than $10,000 held overseas must file a separate FBAR report electronically.
19. Failing to Report Certain Professional Earnings as Self-Employment Income
Suppose you are a limited partner or LLC member involved in professional service industries. In that case, IRS audits if you paid the self-employment tax on their distributive share of the firm’s income.
20. Claiming Foreign Earned Income Exclusion
If you have claimed Foreign Earned Income Exclusion, your tax return may be subjected to an IRS audit to examine if the claim was correct and if all condition for the said claim was satisfied. Brought to you by IRS tax app dot com