Low-Hanging Fruit: Top IRS Audit Triggers Revealed

As the IRS intensifies its scrutiny of tax returns, taxpayers are wise to be aware of the common red flags that can trigger an audit. These 'low hanging fruit' are often overlooked, but understanding and addressing them can significantly reduce the risk of an IRS audit. In this article, we explore the top IRS audit triggers and provide practical steps to avoid them.

1. Inadequate documentation
Poor or incomplete documentation is a major red flag for IRS auditors, especially when it comes to large deductions or credits. The IRS’ use of AI means that even minor gaps in data can be quickly identified and flagged for further review. To avoid this, maintain thorough records and ensure all claims are substantiated with proper documentation.

2. Overstated deductions
Claiming excessive deductions without appropriate backing can draw the IRS’ attention. AI tools are designed to detect patterns and anomalies in deduction claims, increasing the likelihood of an audit if discrepancies are found. Review all deductions to ensure they are legitimate and supported by clear, accurate evidence.

3. Transfer pricing issues
Incorrect or aggressive transfer pricing strategies can result in significant discrepancies that may prompt an audit. AI is increasingly used to analyze transfer pricing data, making compliance with IRS guidelines more important than ever. Implement compliant transfer pricing policies and conduct regular internal reviews to ensure alignment with IRS guidelines.

4. R&D tax credit claims
Claiming the research and development tax credit without sufficient documentation or qualifying activities can be a red flag for the IRS. The agency’s AI systems are particularly focused on scrutinizing R&D claims, making detailed documentation essential. Ensure all claimed activities meet IRS criteria and are properly documented.

To avoid these red flags and minimize the risk of an IRS audit, taxpayers can take the following practical steps:

1. Accurately report all income: Ensure that all income sources are reported accurately, including bonuses, investments, and self-employment earnings. This is crucial as the IRS receives information from third-party sources, such as employers and financial institutions, and any discrepancies can trigger an audit.
2. Maintain thorough and organized records: Keep detailed and organized records of all income, expenses, and deductions. This includes receipts, bank statements, and any other relevant financial records. Proper documentation substantiates claims on tax returns and provides protection in case of an audit or inquiry.
3. Be mindful of large, unusual, or questionable deductions: Claiming deductions that are unusually large compared to your income can raise suspicion. Always ensure that the deduction is legitimate and supported by proper documentation. For example, the IRS uses statistical models to identify deviations from norms for similar income levels, which can prompt a closer look at returns with disproportionately large charitable contributions or excessive business expenses.
4. Understand and apply tax laws accurately: Stay informed about tax laws, credits, and deductions. Understanding and applying these details accurately reduces the risk of errors that might trigger audits. For example, the standard deduction for single filers in 2024 is $13,850, and taxpayers should be aware of specific credits and deductions, such as the Child Tax Credit, to avoid discrepancies.
5. Seek professional help: Consulting with a tax professional can help ensure that your tax return is accurate and compliant with IRS regulations. Tax professionals can provide guidance and support throughout the tax preparation process, ensuring that you are not navigating it alone. For instance, the IRS regulates paid tax preparers to promote compliance and accuracy, requiring them to obtain a Preparer Tax Identification Number (PTIN) and meet due diligence standards.
6. File electronically and on time: Filing your tax return electronically can help reduce errors and ensure that your return is accurate. Additionally, filing on time can help avoid penalties and interest charges, which can also attract IRS attention. For example, the IRS offers free electronic filing options for taxpayers with incomes up to $73,000, making it more accessible to file electronically.
7. Be transparent and honest: In the event of an audit, it is essential to be transparent and honest with the IRS. Providing accurate information and cooperating with the audit process can help minimize any potential penalties or additional taxes. For instance, the IRS provides detailed guidelines and FAQs on their website that outline the audit process, what documents may be required, and how to prepare effectively.

By following these practical steps, taxpayers can minimize the risk of an IRS audit and ensure compliance with tax laws and regulations. Stay informed, maintain accurate records, and seek professional help when needed to navigate the complex world of taxes and avoid common audit triggers.