What Are IRS Audit Red Flags? We get asked this a lot because what taxpayers want to do is they want to try and make their return audit proof so there are a number of things that the IRS looks for on both business and personal returns but it's really difficult to say what exactly red flags are I can give you some general examples so a general example of a red flag is a round number to the extent you're using round numbers on the return. The IRS thinks that you're probably guessing because if you say well I spent five thousand dollars on advertising you probably didn't spend five thousand dollars exactly probably spent four thousand nine hundred ninety-eight dollars or five thousand two dollars or whatever but to the extent you're showing exactly round numbers that's usually a red round flat red flag and an indication of guessing number two would be unusual expenses on a return so things that look like fun that's what I tell my clients are things that usually get audited so international travel lots of meals and entertainment expenses things like well that's a lot of expenses things like that are gonna get you gonna get you probably targeted but what most people don't realize is the IRS actually audits people based on statistics so you can imagine like a like a graph so you have most people who are let's say their restaurant owners.
So you take a whole bunch of restaurant owners and you plot them out based on a couple of different things. What their income is what their gross revenue is? What their cost of goods sold is? So you're plotting these people on a graph and the IRS is looking for outliers so for example if you have a 25% markup and your neighbor has a 75% markup your neighbor is probably going to get on it or you might get on it depending on where you fall within that graph the IRS generally looks at the people on the low end and the high end of the graph and those are the people that it selects for audit because of the propensity for error so when you're thinking about red flags yes there's certain behaviors that you can do to trigger an audit but a red flag from analog perspective is really less about you as an individual and where you fall in on a statistical profile so it's really hard to control your return to minimize your risk of audit a lot of people make the mistake that well if I'm conservative or if I take deductions off. The return I'm less likely to get on and that's not true at all because if you take reductions off the return and you call and you pay more in tax you just pay more in taxes or not like less likely to get audited so when you think about what it red flags engaging in things that are more conservative or aggressive part really at what audits depend on is your relationship to the hurt.