IRS Audit Red Flags: TCA Minimizes the Risk

Every year, the Internal Revenue Service informs thousands of taxpayers that they have been selected for an IRS audit. Last year there were over 164 million individual income tax returns filed, and the IRS audited 626,204 returns (0.38%).  

What is an audit? 

An IRS audit is a review or examination of a business’, an organization's, or individual's books, accounts, and financial records. An audit ensures that the information that was reported on the tax return is reported correctly, abides by the current tax laws and policies, and verifies that the reported amount of tax is correct. The IRS makes an effort to audit tax returns when they are filed, but an audit can be from three years ago in some circumstances. 

Why does the IRS conduct audits?   

The federal government expects to receive a specific amount of income from taxpayers each year. There is a substantial difference between the amount the government expects and the amount they collect. This is referred to as the “tax gap,” and the IRS is motivated to lessen this gap by further examining a percentage of the income tax returns that are filed.  

Should I be worried about being audited? 

As CPAs, EAs, and business consultants, we are often asked about the likelihood of the IRS auditing a person’s tax return. If only we had a crystal ball, right? All jokes aside, even though we do not have that crystal ball, we can share with you that most individual income tax returns avoid being audited. At the end of the day, if your income tax return makes sense and is reported correctly, then you will avoid the fear and anxiety caused by the dreaded IRS audit encounter.  

We spend extra time with you, our clients, going over everything from making sure that all the reported taxable income is correctly recorded, to ensuring that tax credits and supporting documents with your return are in order. Remember our goal is to help you prosper, and for us, that means helping you avoid IRS audit red flags. There is no way to predict an IRS audit, but avoiding these 5 audit red flags could reduce your chances of joining the IRS audit pool.  

5 IRS audit red flags 

1. Failing to report all taxable income 

The IRS has sophisticated technology that can cross-check and verify that the income reported on your return matches what is reported on your 1099s and W-2s. If there is a discrepancy, this can be a red flag. We assist with making sure all income sources are reported correctly on your return.  

2. Wrong Name or Social Security Number 

It seems like such a small mistake but having an incorrect social security number or misspelled name can send up a red flag. Typos happen all the time, and unfortunately so do audits. We make sure to thoroughly review these small, yet particularly important items and encourage you to do so as well before approving your drafted tax return to be e-filed to the IRS.  

3. Non-Filers 

Not filing in general is a red flag, but if you have a high-income and have consistently not filed your income tax return, you could be placed on the IRS's strategic enforcement priorities. Refusing to file after a collections officer has contacted you can result in levies, liens, and even criminal charges.  

We specialize in assisting individuals and businesses with getting back on track and creating strategies and systems to help them stay consistent and confident with filing annually.  

4.Incomplete or Missing Information 

Filing a return with incomplete documentation or missing information is a red flag. It is important that the information in your federal tax return matches any state tax returns you file. The IRS and state income tax agencies communicate and share information, and mistakes like these could spark some attention. 

We pay close attention to the specific details and ensure that your return is complete. We inquire and gather information via discussions, questionnaires, and individualized checklists to avoid incomplete or missing data.  

5. Math Errors; Repeated End Numbers; Too Many Zeros 

Mathematical errors, numbers within a complicated expense category that are clearly rounded up, and placing the same end number repeatedly may raise an eyebrow and send a red flag to the IRS.  

Mathematical errors occur, especially in the form of deductions on your return, but it is a red flag that can be avoided. We minimize these errors by using high quality software to prepare your tax return, and carefully review the documents that we receive from you to ensure accuracy.  

Documents that are filled with numbers that end with a bunch of zeros and/or repeated end numbers can suggest that the taxpayer or preparer was guessing. We never advise someone to guess on a tax return. We review the information provided to us by our clients, check for these and other avoidable red flags, and discuss the best steps and strategies with our clients before any returns are filed to minimize risks. 

This is just five of the many red flags that can gain IRS audit attention. Some of these red flags could simply be classified as mistakes, but when these mistakes are found it can suggest that a taxpayer carelessly prepared their return and/or did not report or file properly.  

Our TCA Approach 

We ensure adherence to federal, state, and local taxing authorities’ regulations, as well as provide timely filing. As tax laws change, we make sure that you and your business are aware of the laws and the application of those laws in your tax filing and compliance procedures. Our dedicated team has combined knowledge of business, tax planning, tax preparation, and tax compliance, which creates great opportunities for our team to deliver sophisticated and practical solutions. Our goal is to help you prosper and avoid these and more audit red flags.