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IRS Red Flags

• 1. Common flags that trigger IRS Correspondence
• a. Above the line flags
• i. Taxpayers that fail to report all income will almost always receive an IRS notice.

Many taxpayers have multiple sources of income, and each of these need to be

• reported. The IRS matches reported income thoroughly.
• ii. Improperly reporting self-employment income/tax (reporting self-employment

income on line 21) is an IRS red flag.

• 1. Income on line 21 doesn’t trigger self-employment tax
• 2. Income of more than $400 on line 21 is considered self-employment

and will often trigger IRS correspondence

• iii. Deductions
• 1. Educator expenses – this deduction only applies to educators teaching

grades K – 12 who work at least 900 hours

• 2. Moving Expenses – Only eligible to taxpayers who pass the time and

distance test, which means that the taxpayer has been employed for 36 weeks and moved greater than 50 miles. The move also needs to be necessary for the job, and only reimburses for expenses not covered by their employer.

• 3. Student Loan Interest – Student loan interest can be deducted up to

$2,500. This deduction is different than an education credit.

• 4. Alimony – Alimony does not include child support or noncash property
• settlements. Mismatches in data reported by ex-spouses is a red flag.
• b. Below the line flags
• i. Schedule A Deductions
• 1. Medical Expenses – Medical expenses exceeding 10% of the taxpayer’s

AGI can trigger IRS notices. Additionally, if medical expenses rise as a taxpayer’s income rises, the IRS often wants to take a closer look.

• 2. Charitable Contributions – Can be an IRS red flag if charitable

deductions are disproportionately large compared with income.

• 3. Business Expenses: Form 2106
• a. Unreimbursed Employee Expenses – expenses must be ordinary

and necessary to the profession or business. High, even amounts are also a red flag.

• b. Claiming 100% Business Use of a Vehicle – It is rare for an

automobile to be used 100% of the time for business use.

• c. Business Meals, Travel, and Entertainment – large deductions

for these items are an IRS red flag.

• c. Earned Income Credit/Child Tax Credit Flags
• i. The IRS is looking at the following pieces of information in regards to Child Tax

Credits

• 1. Age – is the child under age 17?
• 2. Relationship – how is the child related to you?

• 3. Support – Did the child provide for less than half of their own support?
• 4. Dependent – Do you claim the child as a dependent on your tax return?
• 5. Citizenship – Is the child a U.S. citizen, U.S. national, or U.S. registered

alien?

• 6. Residence - Did the child live with you for more than half of the year?
• ii. Earned income credit requirements look at some of the same factors.
• 1. Continuously moving dependents will also create a red flag.
• 2. Dependents being claimed more than once will trigger IRS

correspondence.

• 3. Disabled relatives are often looked into closely, especially if this is the

first time a taxpayer has claimed the dependent.

• d. Schedule C Flags
• i. $0 gross revenue or low gross revenue with excessive expenses resulting in

business loss is a red flag.

• ii. Even revenue and/or expense figures can trigger correspondence.
• iii. Home office deductions often need to be verified, especially if the schedule C

reports a loss

• e. American Opportunity Credit Flags
• i. Taxpayers are likely to receive correspondence to verify grants and scholarships.
• ii. Taxpayers are likely to receive correspondence to verify expenses such as books,

computers, and supplies

• iii. Return will be flagged if the credit has been claimed more than 4 times
• iv. Mismatches between university data and taxpayer data will normally result in

an IRS letter

• f. IRS Identity Theft Flags
• i. Changes in address often trigger a letter to confirm the new address and verify

that the taxpayer is who they say they are

• ii. If a dependent faces an identity theft issue with the IRS, that can now be

reported and resolved.

• 2. IRS Correspondence Methods
• a. Initial IRS correspondence can only be sent via the United States Postal Service.
• b. Initial IRS correspondence will never be sent via phone, email, fax, or social media.
• 3. Common Notices and Letters
• a. CP (Computer Paragraph) letters are sent for some of the following reasons:
• i. Taxpayer has a balance due.
• ii. The IRS has questions about the tax return.
• iii. The IRS is attempting to verify the taxpayer’s identity.
• iv. Additional information is needed or a form is missing.
• v. There are proposed changes to the tax return by the IRS.
• vi. There are delays in processing the tax return.
• b. Types of CP Letters
• i. CP2000 – The income and/or payment information the IRS has on file does not

match what was reported on the tax return.

• ii. CP22E – As a result of a recent audit, the IRS has made changes to the tax return

and the taxpayer owes additional money.

• iii. CP09/CP27 – The taxpayer may be eligible for the Earned Income Credit but did

not claim it on their tax return.

• iv. CP10A/CP12A/CP13A – The IRS made changes to the tax return because of an

error regarding Earned Income Credit calculation

• v. CP75 – The IRS is auditing the return and needs documentation to verify the

Earned Income credit claimed. The IRS will hold the portions of the refund related to this audit.

• vi. CP3219A – The IRS received information that is different than what was

reported on the tax return. This notice explains how the difference was calculated and how to challenge the decision.

• vii. LTR 12C – Additional information is needed to process the tax return.
• 4. Common Mistakes Made by Taxpayers
• a. Taxpayers often make mistakes when receiving correspondence from the IRS.
• i. Panic – Many IRS notices are not difficult to respond to. Staying Calm is the best
• ption.
• ii. Ignore the Notice – Some taxpayers pretend the notice doesn’t exist, but almost

all IRS correspondence requires attention.

• iii. Try to Respond Themselves – Taxpayers sometimes try to respond themselves

to the IRS. At the very least, they should receive some advice from a tax professional before responding.

• iv. Delay – IRS notices have a strict deadline, and it is important to respond by then
• r request an extension.
• v. Blame their Tax Professional – Most IRS correspondence is computer generated

and has nothing to do with the accuracy of the tax return or the quality of the tax preparer.

• b. Other Taxpayer Tips
• i. Pay careful attention to what the notice asks for and says.
• ii. Compare changes that the IRS has made with the original tax return to ensure

they are correct. If you disagree, it is important to respond and provide additional information for the IRS to consider.

• iii. Most notices do not require an in person visit or even a phone call to the IRS.
• iv. Always keep copies of notices received from the IRS.
• v. Be alert for tax scams. In the past few years, tax scams have increased

dramatically.

Common IRS Red Flags – Key Terms

Above the Line Deductions – Deductions that affect adjusted gross income (AGI) and would appear in the top section of a tax return. Alimony – A court ordered provision for an ex-spouse; does not include child support or noncash property settlements. American Opportunity Credit – A credit for qualified education expenses paid for an eligible student for the first 4 year of higher education. Below the Line Deductions – Deductions that are calculated after calculating AGI and are subtracted from the final AGI number. They would appear in the lower section of a tax return. Charitable Contributions – Contributions to qualified organizations that’s can reduce tax liability. Child Tax Credit – A tax credit available to taxpayers with qualifying dependents that pass the age, relationship, support, dependent, citizenship, and residence tests. CP Letter – A computer generated letter sent to a taxpayer to verify tax information or propose changes to a tax return. Earned Income Tax Credit – A benefit for working people with low to moderate income that reduces the amount of tax owed and may provide a refund. Educator Expenses – Unreimbursed trade or business expenses that can be deducted for qualifying K-12 teachers who worked over 900 hours in a school year. Home Office Deduction – A deduction available for taxpayers that use part of their home for business. Medical Expenses – Payments for the diagnosis, cure, mitigation treatment, or prevention of disease, or payment for treatments affecting any structure or function of the body. Moving Expenses – Unreimbursed costs as a result of job relocation who are employed for at least 36 weeks and move more than 50 miles. Student Loan Interest – Interest paid during the year on a qualified student loan. Unreimbursed Employee Expenses – Certain work related expenses that are both ordinary and necessary to the profession or business.