IRS Tax Audit: 20 Triggers!


IRS tax audit trigger points are a collection of probable reasons that invite IRS attention to your tax return. These are went most common reasons for the selection of your tax return for deep examination.

1. Undisclosed Income

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 the selection of 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 . Your tax return data are matched with the data available with IRS and if there is a  discrepancy, IRS system will raise a red flag on your tax return . In fact , that discrepancies alone  will trigger for an irs audit letter..

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 big 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, chances are very good 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 IRS audit notice. Then, business owners who report substantial losses on Schedule C, especially 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 IRS about rental income is that people earning rental income 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 years after years, that also is a cause for selection of your tax return for audit by IRS. IRS invariably chose to audit cases of claiming losses on rental properties. Basically they want to examine if the passive loss rules apply to them. The rule of passive loss prevents the deduction of rental real estate losses, but there are two important exceptions.

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. That’s because these vehicles are eligible for more favourable depreciation and expensing write-offs.

8. Claiming the American Opportunity Tax Credit

The AOTC is worth up to $2,500 per student for each of 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

The rules on deducting alimony were changed pursuant to TCJA which Alimony is neither taxable nor deductible or write-offs. Alimony also doesn’t include child support or noncash property settlements. So IRS will try to examine if they sniff you have claimed alimony write-offs .

12 . Failing to Report Gambling Winnings or Claiming Big Gambling Losses

Failure to report gambling winnings can draw IRS attention, especially if the casino or other venue reported the amounts on Form W-2G. If you report large losses on Schedule A from recreational gambling but aren’t including the winnings in income, you may invite attention of IRS.

13. Claiming Loss Adjustment on Marijuana Business

Federal tax law bars tax deductions related to any business that is illegal 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 buys and sells stocks as investments, your losses can not be classified as trade loss. But that loss classifies 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 return for audit.

15. Taking the Research & Development Credit

If your tax return shows huge R&D credit, IRS may select the case for an Audit to examine if it was not claimed fraudulently.

16. Cryptocurrency Transactions

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

If you make large cash purchases or deposits, be prepared for IRS scrutiny. 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 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 :

  1. more than $50,000 ($100,000 for married couples filing jointly) on the last day of the tax year, or
  2. 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 is not the same as  FBAR (Foreign Bank and Financial Accounts) reporting under which us citizens with more than $10,000 held overseas must file a separate report FBAR report electronically.

19. Failing to Report Certain Professional Earnings as Self-Employment Income

If you are limited partners or LLC members and also involved in professional service industries, IRS checks if the self-employment tax on their distributive share of the firm’s income was paid.

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 all condition for the said claim was satisfied. Brought to you by irs tax app dot com

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