The IRS does not explicitly define "red flags," but rather uses a variety of methods to identify tax returns that may require further review. Filing an accurate return is the best way to avoid an audit. The IRS may flag a return if income or other details don’t match what employers, banks, or other third parties reported.
What Actions Does the IRS Consider Suspicious?
Several factors can increase the likelihood of an IRS audit. The IRS uses various methods to identify returns that may have unreported income or other discrepancies.
Information Matching
If the income or other details on your return don’t match what employers, banks, or other third parties reported, the IRS may flag your return. When this occurs, you might receive a CP2000 notice, which explains the discrepancies and proposes changes.
Related Examinations
If your business partner or investor is being audited, your return might also be selected. The IRS may examine returns associated with individuals or entities already under scrutiny to ensure consistency and accuracy across all related filings.
Local Compliance
The IRS sometimes focuses on certain areas or industries. If your return falls within one of those, it may be selected. This targeted approach allows the IRS to address specific compliance issues prevalent in certain regions or sectors.
Computer Scoring
The IRS uses a scoring system to identify returns that have a high rate of unreported income. Some returns receiving a high score are selected for an audit. This system helps the IRS prioritize returns that are statistically more likely to have errors or omissions.
Court-Generated Reports
If a court links you to a potentially abusive tax strategy, such as those designed to hide income or evade taxes, your information may be sent to the IRS. The IRS may investigate individuals or entities involved in schemes identified by the courts.
People Also Ask (PAA) Section
What Triggers an IRS Audit?
Several factors can trigger an IRS audit, including discrepancies between reported income and third-party reports, involvement in abusive tax strategies, and high scores from the IRS’s computer scoring system. The IRS also focuses on specific areas and industries to ensure compliance, which can lead to increased scrutiny for taxpayers in those sectors.
How Can I Avoid an IRS Audit?
To minimize the risk of an IRS audit, ensure that your tax return is accurate and consistent with all financial documents. Report all income, claim only eligible deductions and credits, and avoid any tax strategies that seem questionable or too good to be true. Keeping thorough records and seeking professional tax advice can also help.
What Should I Do If I Receive an IRS Notice?
If you receive a notice from the IRS, don’t panic. Respond by the date noted in the letter. Contact a tax professional, and gather all relevant tax records to address the issues raised in the notice. It may be a simple request for clarification or additional information.
Understanding what the IRS considers suspicious can help you file accurate tax returns and avoid potential audits.
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