By Elizabeth O'Brien

Tax filing season is under way amid reports of widespread staffing cuts at the Internal Revenue Service. Yet the same rules still apply for taxpayers. This includes filing an accurate return that minimizes your chances of getting audited.

The IRS has begun to lay off thousands of employees in keeping with efforts by the Department of Government Efficiency to cut costs across the federal government, according to reports. Among those vulnerable to layoffs are staffers hired recently to focus on audits of corporations and the wealthiest taxpayers -- raising questions about whether the IRS will be able to police tax evasion, fraud, and other malfeasance as effectively.

"You would think they would want to keep people who do audits, because that generates revenue," says Jane Gorham Ditelberg, director of tax planning at Northern Trust.

The IRS didn't respond to a request for comment on the agency's plans for audits and how any staffing cuts could affect them.

Still, taxpayers shouldn't bank on lax enforcement. Certain issues in your return can automatically trigger audits.

Every year, the IRS publishes a list of "dirty dozen" tax schemes to avoid. In past years, they have included offshore accounts, including individual retirement accounts in Malta or elsewhere, that are promoted as out of Uncle Sam's reach. In reality, "the IRS can identify and track anonymous transactions of foreign financial accounts as a way to avoid taxes in the U.S.," the agency says.

Scams abound during tax season, so remember that the IRS will never text you for any reason or call to demand payment for money owed. The agency always initiates correspondence, including audit notices, via letters in the mail.

While there's no surefire way to prevent getting audited, below are two red flags to avoid to minimize your chances.

Not Reporting All Your Income

Neglecting to report all your income is the biggest red flag, tax preparers say. Employers and financial institutions must provide records to the agency, which squares what it receives with what you report. This includes third-party payment apps like Venmo and PayPal.

For 2024, payment apps were required to send out a 1099-K form to users with payment transactions for goods and services sold exceeding $5,000, although some states have lower thresholds. Income below the thresholds must still be reported, even if no form is received.

Accurately reporting gains or losses from cryptocurrency is also important. Brokerages like Coinbase Global are now required to report transactions to the IRS as "miscellaneous income," using Form 1099-MISC if you earned $600 or more from crypto. Even below the $600 threshold, the IRS says you must report any digital-asset transactions.

Bitcoin and other cryptocurrency is generally treated as property and, like stocks, is subject to capital-gains taxes and losses in taxable accounts. If you receive payment for a job in crypto, however, it is taxed as ordinary income.

Taking Big Deductions

The IRS looks for taxpayers who may try to minimize or avoid their tax liability by taking big deductions of expenses or losses in relation to their income.

One red flag: taking advantage of the rule allowing real estate professionals to deduct expenses such as marketing costs, office expenses, and property repairs.

To meet the IRS definition of real estate professional, the agency requires that property owners spend more than 750 hours during the year on the business. Rental property owners who don't rise to that level can still deduct certain expenses, but they are more limited than what's allowed for real estate professionals.

If someone who works mainly in another profession claims to be a real estate professional on the side, "that's an automatic very high audit risk," says Miklos Ringbauer, founder of MiklosCPA.

Big charitable donations relative to income can also raise questions. It's especially important to document noncash donations, which can be harder to value, says Jo Anna M. Fellon, national practice leader of private client services at CBIZ.

Another thing that invites scrutiny is a "chronically unprofitable" business, Ditelberg says. Taxpayers might try to pass their hobbies off as a business in order to deduct expenses. Some typical categories are yacht leasing, horse racing, interior design, private museums, and ranching, she says.

Maybe you own a horse and claim you're a horse racer, but "if you never made a profit and don't have a business plan to get you there, they will be skeptical of losses," Ditelberg says.

Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 13, 2025 02:00 ET (06:00 GMT)

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