What Triggers a Tax Investigation?

Understanding IRS Investigations

The Internal Revenue Service (IRS) possesses the authority to investigate suspected tax fraud or non-compliance. Unlike audits, which focus on verifying the accuracy of tax returns, investigations aim to uncover intentional attempts to evade or misrepresent tax liabilities.

Distinction Between Audits and Investigations

While both audits and investigations involve IRS scrutiny of tax returns, their purposes and consequences differ significantly:

  • Audits: Audits are typically initiated to verify the accuracy of tax returns and ensure compliance with tax laws. They may result in adjustments to tax liability or penalties for errors.

  • Investigations: Investigations are more serious and involve allegations of intentional tax fraud or non-compliance. They can lead to criminal charges, substantial fines, and imprisonment.

Triggers for Tax Fraud Investigations

The IRS initiates investigations based on specific triggers that indicate potential tax fraud or non-compliance. These triggers include:

  • Unreported Income: Failing to report all sources of income, including unreported cash payments or income from side hustles.

  • False or Inflated Deductions: Making false or exaggerated claims for deductions or expenses to reduce taxable income.

  • Misrepresentation of Business Expenses: Inflating or fabricating business expenses to reduce taxable income.

  • Hiding Assets or Income: Concealing assets or income to avoid paying taxes.

  • Failure to File Tax Returns: Willfully failing to file tax returns or filing late returns without a reasonable excuse.

Consequences of Tax Fraud Investigations

Tax fraud investigations can have severe consequences, including:

  • Criminal Charges: Intentional tax fraud is a federal crime punishable by fines and imprisonment.

  • Civil Penalties: The IRS can impose substantial civil penalties for tax fraud, including fines and interest on unpaid taxes.

  • Reputational Damage: Tax fraud convictions can damage an individual’s or business’s reputation and credibility.

Preventing Tax Fraud Investigations

Taxpayers can minimize the risk of triggering a tax fraud investigation by:

  • Filing Accurate Tax Returns: Disclosing all sources of income and claiming only legitimate deductions and expenses.

  • Maintaining Records: Keeping accurate records of all income and expenses to support tax return claims.

  • Seeking Professional Advice: Consulting with a tax professional to ensure compliance with tax laws and avoid potential pitfalls.

  • Reporting Suspected Fraud: Reporting suspected tax fraud to the IRS or other appropriate authorities.

Tax fraud investigations are serious matters with potentially severe consequences. By understanding the triggers for investigations and taking steps to prevent them, taxpayers can protect themselves from legal and financial risks. If you have concerns about a potential tax investigation, it is crucial to seek professional advice immediately.

What the IRS is actually looking for that could trigger a tax audit


What triggers an IRS investigation?

Taxable income that is not reported on your tax return is likely to trigger an IRS audit. Common kinds of unreported income include: Income from a hobby or side hustle.

Why would someone be investigated by the IRS?

Criminal Investigation special agents investigate violations of the tax laws and related financial crimes. Taxpayers who chose to willfully and intentionally not comply with their legal responsibility to file required tax returns and/or pay taxes pose a serious threat to tax administration and the American economy.

What raises red flags with the IRS?

Overestimating home office expenses and charitable contributions are red flags to auditors. Simple math mistakes and failing to sign a tax return can trigger an audit and incur penalties. Taxpayers should report all income from Form W-2, Form 1099, and any cash earnings.

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