IRS is a name that every taxpayer and accountant hears on a daily basis. The IRS reviews a taxpayer’s account and financial information to ensure the rules are followed. The IRS can initiate an audit up to three years after the tax-filing deadline or up to six years if you exclude 25% or more of your income. If you have enough evidence to back you up about your tax deductions, it is one of the easiest processes. But, some common red flags may lead to a tax audit, as well as what you can do to avoid IRS difficulties. And as we move forward with this article, we will discuss five significant red flags that may put you in some not-so-pleasant situations with IRS.

1. You didn’t report all your income received in your bank account

The IRS receives copies of the W-2 forms and 1099s that show your earnings, so you’re not the only one who gets them. Expect to hear from the IRS if the figures are off

2. Exaggerating your expenses and deductions

Many people are hesitant to claim the home office deduction because they are concerned that it would result in an audit. This can be a helpful respite to assist offset the costs of setting up and maintaining a home office. However, not everyone who works from home is qualified; the home office deduction is only available for self-employed workers. You must utilize your house for business frequently. It’s not that you need to have a separate office room, but the least you can do is have a space where you don’t do anything else. It must also be your primary place of business or a location where you meet with clients or patients regularly.

3. Reporting business losses.

You may deduct many expenses when you own a business, but the IRS wants to be sure you didn’t start one merely to take advantage of the deductions. Your firm may have more expenses than income in some years, especially when it’s first starting, but the IRS becomes suspicious if it never earns a profit. Enterprises experiencing net losses year after year, or businesses that appear to be just breaking even, are audit red flags.

4. Having transactions in virtual currency

The IRS just used nearly every tool at its disposal to track down taxpayers who sell, receive, trade, or otherwise deal with bitcoin or other virtual currencies. On page one of the 1040 return, there is now a question about virtual currency activity.

5. Engaging in Cash Transactions

A wide variety of cash transactions above $10,000 must be declared under the Bank Secrecy Act. Otherwise, it will be regarded as an illicit act. Thus, be aware when you make a cash transaction or deposits, or you may face IRS inspection.

The above list isn’t meant to be inclusive; it’s merely meant to make you aware that some acts can result in IRS audits. There could be, in fact, there are more such transactional activities that make you notice to IRS, not so positively. So yes, whatever it is, make sure to be transparent about all your transactions. And you are free from red flags!