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. You 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 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 that. Well that’s a lot of expenses, things like that are going to get you probably targeted but what most people don’t realize is the IRS actually audits people based on statistics. So you can imagine a graph, so you have most people who are let’s say they’re 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 audited or you might get audited 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 an audit perspective is really less about you as an individual and more about 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 audited 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. You’re not like less likely to get audited. So when you think about audit red flags, engaging in things that are more conservative or aggressive aren’t really what audits depend on. It’s your relationship to the audit.