James S. Wang, CPA

As a CPA firm, one of our primary goals is to help clients avoid unnecessary scrutiny from tax auditors. Here are some common red flags that may trigger an audit, ensuring you stay compliant and avoid potential pitfalls:

1. Unreported Income

Tax authorities closely monitor discrepancies between income reported on 1099 forms and tax returns. Large cash transactions or unexplained bank deposits can also raise suspicions.

2. Excessive Deductions

Claiming deductions that are disproportionately large compared to your income is a significant red flag. This includes unusually high charitable contributions and excessive business expenses that don’t align with business income.

3. Home Office Deductions

The IRS scrutinizes home office deductions to ensure they are reasonable and properly documented. Overstating these deductions can lead to an audit.

4. Rounded Numbers

Frequent use of rounded numbers instead of exact figures may suggest estimates rather than accurate reporting, which can catch the eye of tax auditors.

5. Mismatch Between Wages and Lifestyle

Reporting low wages or business income while maintaining a high standard of living can appear suspicious to tax authorities, prompting further investigation.

6. Claiming Dependents

Incorrectly claiming dependents, especially when they do not live with you or you lack the legal right to claim them, is a common trigger for audits.

7. Foreign Accounts and Transactions

Failing to report foreign bank accounts or income from overseas transactions is a major red flag. Large or frequent transactions involving foreign entities should always be documented properly.

8. Large Refund Claims

Filing for unusually large refunds or requesting refunds in years when income was low can attract attention from auditors.

9. Self-Employment Income

Self-employment income and expenses must be accurately documented. Reporting income that significantly deviates from industry norms can raise red flags.

10. Business Use of Vehicle

Deducting a high percentage of vehicle use for business without proper logs or proof can lead to an audit. Accurate record-keeping is essential.

11. Unusual or Complex Transactions

Complex or large transactions without clear explanations or supporting documentation often attract scrutiny from tax authorities.

12. Failure to Report Cryptocurrency Transactions

With increased monitoring of cryptocurrency, failing to report income from such transactions is a growing concern for tax auditors.