I’m an Accountant: These 5 Red Flags Could Spark Interest From the IRS

Every year, people filing their federal and state tax returns take extra care to ensure there are no mistakes. Sometimes, though, certain situations on one’s tax return can trigger IRS interest.

How do you know which actions are considered red flags by the IRS? GOBankingRates spoke with Robert Persichitte, CPA at Delagify Financial, and Lei Han, CPA and professor of accounting at Niagara University, to learn more about five common red flags to watch out for when filing your tax returns.

Do you work any side gigs? If you do, your income might show up on Form 1099 but not on your W-2. According to Han, tax filers should always include the amounts from 1099s in their gross income.

In the event you received a 1099 or W-2 and ignored it or didn’t include this amount when you filed your taxes, Persichitte said the IRS knows about it before you even file your return. 

“Businesses send a copy to you and the IRS at the same time. If you forget about a form, the IRS won’t,” said Persichitte. “Most of the time, they will tack the income onto your return and send you a bill.”

If you run a business and your company is posting losses that are bigger than its revenue, there needs to be a good reason behind it. 

Persichitte cites the joke that the most common tax advice is to write off a G-Wagon every year.

“With bonus depreciation under Section 179, lots of people buy a car and use the entire expense against business income — a legit practice,” said Persichitte. “Some people will get less than $5,000 in revenue and try to use it to justify writing off a $50k+ vehicle. Obviously, it’s not a business choice to spend more than your total revenue on a vehicle.”

Exact deductions generally tend to set off a red alert with the IRS. 

In an article on CNBC, CPA Preeti Shah said the IRS takes notice of business owners in particular that use rounded expenses for their deductions. Shah’s example included listed out advertising deductions at exactly $5,000 or $3,000 for legal expenses on tax returns.

While many self-employed individuals and contractors rely on Schedule C to take necessary deductions, Han said they need to be careful they aren’t reporting too many business expenses. 

Take the time to familiarize yourself with what qualifies as deductible and non-deductible expenses. A business lunch that relates directly to your business or self-employed line of work may be deducted, but your weekly groceries cannot.

“If your charitable contribution is very high in relation to your income, then there is an elevated likelihood to get IRS’ attention,” said Han.