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April 29, 2022


Top three triggers for an IRS audit

There are many potential red flags on your tax return. Most of us know that the Earned Income Tax Credit is something that can provoke an audit. We’ve also talked about lifestyle triggers; buying or writing off luxury items such as sports cars and first-class international airfare when your income is not on the surface conducive to such purchases. We’ve also noted previously that March 2022 reports by Syracuse University (TRAC) and its affiliates found that those reporting under $25,000 and over $200,000 in income are more likely to be audited.

However, there are three other potential triggers that are less well-known.

Are you doing any of these three?

It’s fairly safe to say that being audited is much like getting weighed at the doctor’s office, no adult really enjoys it. But audits do happen and it is better to be prepared than caught off guard. Here are three items that may trigger an audit:

  1. Cryptocurrency. There is rising concern and control within the government regarding digital or virtual currency. They are treated as property on your federal forms; much like stocks or real property. It must be reported in your gross income in fair market value. There is added complexity at the state level because of sales tax. International reporting is still unclear.
  2. Early retirement withdrawals. With some exceptions, these are typically subject to a 10% penalty. Before taking out money from your 401(k) look into the financial repercussions. Know that the IRS’s Automated Underreporter (AUR) Program checks whether or not the tax was paid.
  3. Rounding out numbers. Curious as it sounds when you use round numbers such as $5,000 instead of what may be $4,989 you can unknowingly trigger an audit. One might shake one’s head that a mere $11 can potentially trigger numerous hours of investigation and therefore thousands of dollars in human labor costs. But, as the saying goes, truth is often stranger than fiction.

No one wants to be put under the microscope. Many of us would prefer to have dental work without anesthetic than undergo an audit. Careful and exact filing combined with eschewing potential triggers can help you avoid financial dissection.