The start of the new year means that you must begin to focus on financial matters that are ahead of you. One of the most important things that you will need to deal with is getting into position to file your tax return for 2025. Here, you must exercise both forethought and caution to avoid raising red flags that can raise the risk of an IRS audit. The agency is on the lookout for various things that may cause them to look further into your tax return and potentially assess back taxes and penalties. Consulting with a New York tax attorney at the Thorgood Law Firm can help you potentially avoid IRS audits. Here are red flags that you should steer clear of in your tax return.
First, you should know how the IRS ultimately selects tax returns for audits. There are both computer and human reviews of your return once you have filed it. A computer may detect something that the IRS may ordinarily view as suspicious. Then, a person may give additional scrutiny to your account before deciding whether to take action. In some cases, if the IRS views a taxpayer as high risk, the agency may lead with human review.
Failing to Report All Income
The IRS has access to information regarding the income that you have earned in the previous year. Those who pay your income are obligated to file a report with the IRS by the end of January 2026. The IRS computer systems will automatically compare what you have reported to what they have received from your sources of income. If there are any discrepancies, the IRS may automatically send you a notice for taxes due because of underreporting of income. Further, this issue may result in the IRS taking a closer look at your credits and deductions and potentially challenging them. Make sure that you have a tax lawyer to accurately calculate all of your prior year income and fully report it to the IRS.
Excessive or Unusual Deductions
You have the right to claim every deduction and credit to which you are entitled under the Internal Revenue Code. However, there is a fine line between maximizing your tax deduction and taking things too far. The IRS is on the lookout for what it views as suspicious deductions, and taking them can be a red flag for the agency. The IRS may conduct an audit when the overall amount of your deductions is disproportionate to the amount that you have earned. In addition, the IRS may conduct an audit based on the individual deductions that you are claiming. For example, the IRS may give additional scrutiny to your returns when you claim the following:
- Excessive charitable contributions
- A large home office deduction
- A large number of dependents
- Large medical expense deductions
Repeated Business Losses
You may have a business as a primary source of income or as a side gig to your regular job. While business losses can serve as a tax shelter under various circumstances, excessive or repeated business losses can also seem suspicious to the IRS. The IRS will see repeated and excessive business losses as a sign that there may be an attempt at tax evasion. You can expect that the IRS may ask for more information that supports the losses that you have claimed, if they do not launch a full-scale audit first.
Filing Your Taxes Late
The IRS expects that you will file your taxes by April 15 of each year (or October 15 if you have sought an extension) as required by federal law. Missing the deadline without an extension is a violation of federal law. Even when you finally file your taxes, the IRS may pay closer attention to your return, knowing that you have already failed to follow federal law. Depending on when you file, the IRS may have extra time to give closer scrutiny to your return, which could include an audit. Then, any back taxes that you must pay come with substantial penalties and interest attached.
Cryptocurrency Transactions
You do not have to avoid crypto transactions entirely because of the tax scrutiny that it may trigger. However, you should know that the IRS has been paying much closer attention to tax returns that show frequent activity in digital assets. The agency has issued new rules in recent years that may make it even more difficult to file your return. Nonetheless, if you have engaged in crypto activity in the prior year, it is crucial to get your reporting right, with full knowledge of recent rule changes. Otherwise, the IRS may audit not only your crypto activity, but everything else that you have reported on your returns (such as income and deductions).
Calculation Errors
The IRS automatically performs its own calculation of your return based on the numbers that you have reported. They will correct any mathematical errors that you have made on your return on your own and reflect it in either your tax refund or the back taxes notice that they have sent you. However, the presence of repeated or large calculation errors may trigger further review of your tax return. Making mistakes can undermine your credibility with the agency and make them more suspicious of other things that you may have reported on your return.
Contact a New York Tax Lawyer
An IRS audit can be stressful, time-consuming, and costly. Proactive legal guidance can significantly reduce your risk. A New York tax attorney at Thorgood Law Firm helps clients avoid IRS audits by ensuring accurate filings, identifying red flags before returns are submitted, and addressing compliance issues early. If you have received IRS notices, have complex income, cryptocurrency transactions, or prior filing issues, we can step in to protect your interests. Do not wait for the IRS to come to you. Contact Thorgood Law Firm today to safeguard your finances and move forward with confidence. You can speak with a trusted lawyer by calling us today at (212) 490-0704 or by sending us a message online.
