Red Flags That Trigger IRS Audit In 2022 | John Briggs, Incite Tax
John Briggs breaks down what triggers IRS audits: self-prepared returns with calculation errors, unreported gambling winnings, and mismatched estimated payments. Audit risk jumps to 12% for incomes over $1M. Large Schedule C losses, home-office deductions, and strategies like Charitable Remainder Annuity Trusts are red flags.
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What are some tax filing red flags? So, at first, obviously this question is relating to being audited. I think it's important to know that when the IRS gives you statistics on how many people they audit, when they send a letter to you saying they made an adjustment or asking for a copy of your W-2 or 1099, Or any little thing like that, just a type— a letter that's simple, they still consider that an audit. When you and I think about an audit, we're thinking about they're knocking on my door, I have to go into their actual office, they want all my itemized receipts, they just want a really deep level of information. Those are the audits we're typically referring to. So, let me first say That when it comes to the IRS letters itself, there's a few things that cause those. When you do your own taxes, surprisingly, a large percentage of people who self-prepare have inputted their information incorrectly. That is an automatic letter from the IRS because your calculations are going to be off. Missing information is also another reason. Just dealt with a client who didn't tell us they received any health insurance premium subsidies. That's if you get your insurance through like healthcare.gov. And we e-filed her return and the IRS system immediately rejected it saying, you received, or taxpayer received premium subsidies, that information is not on the tax return. So automatic rejection. Another common thing that people miss is gambling winnings. If you go to a casino and you make more than— I don't know if it's $250 or $600, I don't actually gamble so I don't know. It's $250 or $600, it's a small amount. You have to actually give them your information so that they can create a form for you. Sometimes people overlook that, especially when it's a smaller amount, and especially because most people who have gambling winnings have gambling losses that exceed that. But if you don't report the gambling winnings, you can't report the gambling losses, and therefore they're going to want you to pay tax on it, so don't forget those. If your estimated payments are inputted incorrectly, so maybe you put a number on the return but you made more payments or less payments, That's going to cause a letter to come to the IRS. Now, when you get those, obviously the best thing to do is check and make sure that you know how much you paid the IRS. A lot of times they apply your payment to the wrong tax year, I think on purpose, and so then it's your job to show them the clear check image from your bank account and say, hey, I actually paid that and you need to apply it to this tax year. So keep that in mind. And then an automatic red flag, unfortunately, if you make more than $200,000, that's one threshold. So like most taxpayers, 1% of them get audited. 4% of taxpayers who make $200,000 or more get audited. And then if you make $1 million or more, 12% of those taxpayers get audited. So the more money you make, the higher likelihood it is, and from a business standpoint, it's one of the few things that makes sense to me. I don't love it because it does feel like they're picking on wealthy people who usually provide jobs and help the economy, but there's bigger bang for their buck in the time they spend on those, theoretically. Of course, I'm sure everyone files taxes as well as we do, so there's No changes, but just the more money you make, the higher likelihood they're going to want more information. So now it comes to the red flags that could likely result in you needing to provide a lot more detailed information, or the IRS is going to come and do a full-on examination, as they call them. If you have high W-2 income and a Schedule C business that has a loss, And the bigger that loss, the bigger the red flag. They're going to want to look at that because in their mind they're seeing this guy is just trying to write off money because he has a W-2 job. So they want to make sure this person can prove they actually have a legit business. Schedule Cs in general actually are a bit of a red flag. Like I said, especially the bigger the loss. We have some strategies that we use where a Schedule C is involved, but those Schedule C businesses show zero or a small, like $100 net income. There's a form where you can write off your home office space. It's called the Business Use of Home form. That is an audit trigger. So, if you can get away with not filing it because maybe it's a super ridiculous deduction, requires calculations but you don't really get much of a benefit out of it, maybe consider not filing it. Some higher-end strategies, sometimes people do what they call, it's called a CRAT, a Charitable Remainder Annuity Trust. Those usually end up getting flagged for audits because it's on the Dirty Dozen list, people have abused it over the years, Doesn't mean it's not legit, it's just because of the abuse, the IRS has a higher likelihood to audit that. Not filing at all ends up being an audit trigger. Now, that usually plays out after multiple years. You know, if you don't file now, 12 months later, you're probably still not— you haven't heard from the IRS yet. And the first notice you're going to get is a letter just saying like, We have record of you receiving taxable income, we don't have a file for you yet. Either it's going to say, we think you owe us this much money, so pay us, or, you have X amount of time to give us an actual return. But not filing at all is a problem. Earlier in my career, one of my first clients came to me because after 8 years the IRS found him, and they came to his door and knocked on the door and, you subpoenaed him and everything. He hadn't filed for almost a decade. Conservation easements is another big trigger. Great tax strategy, they are legit, but there are people in that space that are scoundrels, and you really want to make sure you do your due diligence and stay away from the really bad companies, because even when you use a legit company following the rights methodology, you have a high likelihood the IRS is going to ask for information about it. High likelihood, more than 50% for sure. And so when they ask for information, you want to feel good that the information you're going to provide is coming from a reputable company who's not being super aggressive on the way that strategy works so that you don't get anything reversed or worse, they hit you up with fraud, which can happen. So conservation easements, know you're likely going to get audited and make sure you do your due diligence before you hit that strategy so that the company, you feel good about the company. Captive insurance is another strategy, again, high-end. Some of these might, you may not have heard these terms before, but abusive scenario, still a legit strategy, but it's got to be done the right way. So chances are you might get an audit if you have that in place. And then if you want to call yourself a day trader and you end up taking a loss, the way you do that is actually on a Schedule C as if you're a business, and that's treated very differently than just me trading stock and having a loss from trading stock. Day trader classification gives me much more favorable tax benefits. So if you do that, there's a high likelihood you're gonna get audited. So just know that going into it, you're gonna need to prove how you qualify as a day trader. We have clients who are day traders, not a problem. You just gotta be able to prove with, you know, the qualifications like, yep, day trader over here, but they'll likely ask for it. So that's a wide array of Areas that come to mind when I hear the question, what are red flags with filing your tax returns? Yeah, just keep in mind there are lots of other things that potentially could lead to audits. I picked the ones that we see the most often. Foreign bank accounts, I mean, there's other things like that that are, unless you have it, it's not really worth taking another 10 minutes to go over all those. But keep in mind the ones that I shared, and if you ever have any questions, hey, we're here for you. So check us out, reach out to us, contact us, we're happy to help. And let's, let's lower that tax liability so that you can stick it to the IRS. All right, remember, profit is a choice. Have the courage and wisdom to choose it.
