The old adage about death and taxes doesn’t hold true for a tax audit by the IRS. There are steps you can take to avoid or minimize your chances of being selected for audit.

Except in the cases of fraud, failure to file, or omission of gross receipts in excess of 25% of gross income, the IRS typically has 3 years to select a tax return for audit. Current audit rates for S corps and entities taxed as partnerships is around .4% while audit rates for individuals filing a Schedule C with gross receipts between $25k and $100k is 1.4% according to IRS data from 2014.

Although audits are at an all-time low due to budget constraints, taxpayers can reduce their chances of an audit even further by avoiding a few common “red flags”.

1. We will start with an easy one first. The chances for an audit go way up if your tax return does not match to all your source documents, like W-2s, 1099s, K-1s, estimated tax payments, etc. The IRS eventually matches all this information to your tax return and you will receive correspondence from the IRS if you have a math error or something doesn’t agree.
2. Schedule C business losses. Sole proprietorships (i.e. Schedule C filers) are a target for an IRS audit particularly if the business has reported losses for more than 2 years in a row. If the Schedule C business is cash intensive (such as a restaurant, bar, hair salon, sandwich shop) the IRS is even more likely to take a look. As a generalization, the IRS often takes the position that business owners of a sole proprietorship comingle personal and business expenses. Again, as a generalization, the IRS is also skeptical as to why a sole proprietor would continue to operate a business year after year that continues to lose money. Often in these types of audits, the IRS looks at travel expenses, meals and entertainment, auto expenses and any other items that could have a personal component and therefore are not legitimate business expenses.
3. Large deductions. Over many years, the IRS has crunched the data as to how much of a mortgage taxpayers can afford at every level of income. The IRS also knows the average charitable contribution for taxpayers at every level on income too. If a taxpayer strays to far from the ranges developed by the IRS computers over the years, they are likely to increase their chance of an audit.
4. Failing to report a foreign bank account. A major focus in recent years where the IRS has had tremendous success is with taxpayers who stashed money outside of the US. Between the data collected from amnesty programs and US authorities success in getting account information from foreign banks, the IRS has more tools and resources to examine taxpayers who fail to report an overseas bank account.