What Income Is Most Likely to Get Audited?

When filing your taxes, it’s crucial to be aware of which income sources might increase your chances of being audited. While everyone’s tax return is subject to review, the IRS tends to focus on certain types of income that are more likely to involve discrepancies or complexities. Understanding which income streams may attract attention can help you take extra precautions in your reporting and reduce the risk of an audit.

1. Income from Complex Investments

One of the most common triggers for an IRS audit is income from complex investments. This includes income derived from real estate transactions, foreign assets, or investments in hedge funds and partnerships. These types of investments often involve multiple transactions, deductions, and credits, which can lead to complicated tax filings. Any mistakes or misreported information can be easily flagged by the IRS, leading to an audit. 

Additionally, investments in foreign accounts or properties can raise suspicions of underreporting or tax evasion if not properly documented. To mitigate this risk, ensure that all investment income is reported accurately and that you maintain thorough records of every transaction.

2. Significant Discrepancies in Reporting

Another major red flag for the IRS is a significant discrepancy between the income reported on your tax return and what third-party sources, such as employers or financial institutions, report. For example, if your reported income doesn’t match the figures listed on your W-2 or 1099 forms, the IRS is likely to investigate further. 

Business owners are also at risk if their reported income significantly deviates from industry norms or the financial statements of their business. For instance, reporting far lower earnings than comparable businesses or underreporting sales can prompt an audit.

3. High Income Earners

While not a direct cause of an audit, high-income earners are more likely to be scrutinized due to the complexity of their tax returns. Wealthier individuals often have multiple sources of income—such as salary, dividends, interest, business profits, and capital gains—each requiring careful reporting. 

The more complicated your income sources, the higher the chances that mistakes or errors could trigger an audit. In particular, those with large deductions or credits are advised to ensure they’re following IRS guidelines to the letter.

Conclusion

Income from complex investments and discrepancies in reporting are the primary factors that make individuals more likely to face an audit. Being thorough, maintaining detailed records, and staying transparent about your income will help protect you from unnecessary scrutiny. While no one can completely avoid the possibility of an audit, understanding what the IRS focuses on can allow you to take proactive steps to minimize that risk.