IRS Red flags when filing a Tax Return

April 5, 2016 | By Steven DiGregorio

IRS Red Flags

IRS Red flags when filing a Tax Return

Here is a note that will get you on the phone with your financial advisor in a hurry:


Dear Taxpayer, Some of the information that you provided to us does not agree with the information we received from other sources. — The Internal Revenue Service

You’ve got a better chance of catching a cold than being audited by the IRS, typically the Internal Revenue Service audits about 1 percent of the tax returns filed annually. In fact, the IRS is focused on individuals whose annual reported income is greater than $200,000. The odds of being audited are directed correlated to the more income you report, for those making $1 million or more the odds increase to one in ten.

Red Flags

The IRS’s computer-scoring system is known as the Discriminant Information Function, or DIF. Tax returns are evaluated based on identifiers such as select category deductions, credits and exemptions based on taxpayer norms in each of the income brackets.

Most tax experts agree that the primary trigger that flags a tax return for an audit is the average deduction amounts. Inconsistencies, such as a high mortgage interest deduction and low income get the IRS’s attention.

Tax specialists at Wolters Kluwer Tax & Accounting US examined 2012 return statistics, the latest complete data, and came up with the following itemized deduction averages. These numbers are directional at best — consult with your CPA or asset manager to assess your individual deductions.

IRS Red Flags

What is likely to trigger a discriminant information function red flag?

  • Higher incomes.
  • Income other than basic wages (i.e. contract payments).
  • Unreported income (i.e. investment returns).
  • Home-based businesses (i.e. salary income, and home office deductions).
  • Non-cash charitable deductions.
  • Large business meal and entertainment deductions.
  • Excessive business auto usage.
  • Losses from an activity that could be viewed as a hobby rather than a business.
  • Large casualty losses.
  • Returns claiming the earned income tax credit, designed as a tax break for lower-income wage earners, also catch IRS eyes.
  • Schedule C filers who report a business loss also are likely to face more questions from the IRS. The agency wants to be sure that it was indeed the economy, and not an effort to trim taxes, that produced the bad business results.

Common entries that get the government’s attention:

Typos and omissions

Any difference between what your employer reported you earned in their filings and what you personally reported earned will raise a red flag.

No income

Any business reporting a loss or low income may be a red flag  – especially if they are associated with other people or businesses that are known to avoid paying taxes.

Large charitable contributions
Unusually high charitable contributions regardless of income typically raise a red flag with the IRS. Charitable deductions are frequently reported without proper documentation or occasionally made fraudulently. Make sure you document all your contributions.

Report the sale of your home: When you sell your home, the title company will send you and the IRS a 1099-S form, recording the proceeds from the sale.

Even if all your capital gains on the sale are tax-exempt (because they didn’t exceed $250,000 if you’re single or $500,000 if you’re married), DeFilippis recommends you report information from that 1099-S on your return anyway.

His reason: the 1099-S is part of the IRS form-matching program. Not reporting it may generate a correspondence audit.

Be smart about mortgage interest: When you own a home with your spouse, your lender will send you and the IRS a Form 1098, which records how much mortgage interest you paid during the year.

You have every right to claim all the deductions that are entitled to you, there is no good reason to ever leave money on the table. As long as your deductions and expenses are legitimate and you have documentation to support your tax return, in most cases you’ll be in good standing with the government.



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Please note that the content of this blog does not constitute tax advice and is only intended for the educational purpose of the reader.  Please consult your tax advisor for specifics regarding your circumstances.

For more information contact us at 845.563.0537 or

Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.







Bell, K. Red flags that tempt the tax Retrieved on March 17, 2016 from

Reeves, J. (March 15, 2014). IRS red flags: How to avoid a tax audit. USA TODAY.

Sahadi, J. (February 25, 2015). 8 tax audit red flags. CNNMoney.

Tags: IRS Audit, Red Flags Tax Audit, Tax Fraud

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STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
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