Although the Internal Revenue Service might send an audit letter to a California resident’s home, that does not necessarily mean the taxpayer did anything wrong. The IRS could request proof to substantiate deductions, and the taxpayer may present receipts. Most taxpayers would likely wish to avoid an audit, so it could be helpful to avoid making mistakes that raise audit red flags.
Common red flags
Six red flags often draw attention to a tax return and could trigger an audit. These six issues are:
- Overestimated donations
- Errors and omissions
- Not signing the return
- Failing to report income
- Excess home office deductions
- Income threshold
Failing to sign a return or submitting a return with math and other errors could reflect sloppy preparation. The IRS might pull such returns aside and give them additional scrutiny. Taxpayers may have no one to blame but themselves for submitting poorly composed returns.
Overestimating donations might appear like an attempt to deceive the IRS. Claiming a donated 10-year-old car is worth 80% of its original purchase value would be challenging to explain. Claiming that 70% of an apartment serves as a home office would also be difficult for the IRS to accept at face value. Those who make such dubious claims might find themselves facing civil penalties.
Those who do not report all their income may face tax audits. Such is usually the case when 1099s or W-2 information shows up in the IRS’s reporting system, but the corresponding income is not on the tax return. Businesses that rely on cash transactions might also face audit requests.
Persons earning in the six-figure range might experience higher rates of tax audits. While most tax filers might never deal with an audit, those with higher income levels might deal with more examinations.