4 tax return triggers that can put you on the IRS’s radar

When it comes to IRS attention, not all deductions and activities are created equal. Certain parts of a tax return stand out like flashing warning lights, no matter how honest the taxpayer’s intentions. These “triggers” can lead to extra scrutiny, requests for documentation or a full audit. Knowing what the IRS watches most closely and having the paperwork to back it up can help you protect your clients and avoid unnecessary stress.

Trigger 1: Noncash charitable contributions

The IRS pays special attention to large clothing, household goods or property donations. Claims over $500 require Form 8283, Noncash Charitable Contributions, and larger amounts may need a qualified appraisal dated within 60 days of the donation.
The IRS knows some taxpayers inflate the value of donated goods, especially clothing or used household items, to boost deductions. Vague descriptions like “household goods – $1,000” without receipts or itemized lists are almost guaranteed to raise eyebrows. If your client donates a vehicle worth more than $500, they’ll need Form 1098-C from the charity. Real estate or high-value art triggers even more stringent appraisal rules.

Pro tip: Encourage clients to keep detailed records, including photos, receipts, itemized lists and the charity’s acknowledgment letter. For large donations, work with a qualified appraiser familiar with IRS requirements to avoid disputes over value.

Trigger 2: Cash businesses

Cash-heavy businesses, like restaurants, salons, food trucks, convenience stores and vending machines, are ripe for IRS scrutiny. The IRS will compare reported income with industry norms and also examine the owner’s spending patterns to see if they match the reported income. If your client reports unusually low income for their industry but drives a luxury car and vacations often, expect questions.
Audits in this area often focus on whether all cash sales are recorded. The IRS may use indirect methods, such as analyzing bank deposits, supplier invoices or even electricity usage, to estimate actual sales.

Pro tip: Help clients create systems to track cash sales daily, including register tapes, deposit slips and logs. Even small gaps in documentation can lead to costly adjustments.

Trigger 3: Schedule C losses and hobby rules

Three straight years of business losses? That’s a red flag. The IRS may challenge whether the activity is a legitimate business operating for profit or simply a hobby. If reclassified as a hobby, the taxpayer can’t deduct losses and deductions for related expenses may be limited or disallowed entirely.
The IRS considers factors such as whether the business has a written plan, keeps accurate records, changes operations to improve profitability and invests time and effort like a true business owner. For example, a weekend craft seller who never markets their work or raises prices might be treated as a hobbyist.

Pro tip: Document the business purpose and efforts to earn a profit. Keep marketing materials, proof of client outreach and evidence of operational changes, anything that shows the business is more than a personal pastime.

Trigger 4: Foreign accounts and assets

Do you have money overseas? U.S. taxpayers with a financial interest in or signature authority over foreign accounts must file the Foreign Bank Account Report (FBAR) if the total value exceeds $10,000 at any point during the year. In addition, certain foreign assets must be reported on Form 8938 under Foreign Account Tax Compliance Act (FATCA) rules.
Failure to file these reports can result in eye-popping penalties, up to $10,000 per nonwillful violation and even higher for willful noncompliance. Importantly, these penalties can apply even if no U.S. tax is due on the income. The IRS often receives account information directly from foreign banks under international agreements, so undisclosed accounts are rarely hidden for long.

Pro tip: Ask clients early in the engagement about any foreign accounts or investments, including pensions or ownership in foreign entities. File the required reports on time and keep proof of submission.

Bottom line

Thorough and accurate documentation is the best defense against an IRS notice or audit. Work with your clients to identify any of these high-risk hot spots early, gather the supporting records and keep them organized year-round. That way, if the IRS comes knocking, you’re already prepared.