I Asked ChatGPT What IRS Red Flags Trigger Audits — Here’s What It Said
Though tax time isn’t exactly associated with spooky season, there is one entity that strikes fear into the hearts of tax filers as much as any ghost or goblin would — the IRS audit. An audit is an official review of a person’s or organization’s financial records to verify that the income, deductions and credits on a tax return are accurate. While being flagged for an audit isn’t as bad as being haunted, it still brings plenty of hassle.
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Ideally, you’d work with a CPA or accountant to ensure your forms are accurate and ease your fears of being audited. But I’m an impatient person (yes, I read spoilers before seeing every horror movie), so I asked ChatGPT which tax-prep red flags could trigger an audit.
1. Unreported Income
The first answer wasn’t surprising. According to the AI, the IRS matches your tax return against information in documents such as:
W-2s
1099s
Brokerage statements
Cryptocurrency exchange reports
“If income reported by employers, banks or platforms doesn’t match what you file, it’s a major trigger,” ChatGPT said.
2. Very High Income
While I wasn’t surprised by the AI’s initial response, I’ll admit I was intrigued by its statement that “higher earners are audited at greater rates.” So I did some digging and found a report from Kiplinger writer Joy Taylor that confirmed ChatGPT’s findings.
“According to IRS audit statistics, about 0.4% of total individual returns get audited by the IRS,” she wrote. “This number jumps to 1% for filers who report total positive incomes between $1 million and $5 million, 2.3% for filers reporting total positive incomes between $5 million and $10 million, and about 8% for filers who report total positive income of $10 million or more.”
There’s some good news in her findings: A relatively small percentage of people are audited each year. Of course, you want to do everything you can to avoid being in that group.
3. Large or Unusual Deductions
ChatGPT also informed me that if my deductions look disproportionate to my income, they might get me flagged. So what do these potential red flags look like?
Charitable donations far above average for your income
High medical expenses
Large business expense claims
Claiming 100% business use of a vehicle
Though some of these are easy to avoid — despite my big heart, I can’t donate more than I earn to my favorite charities, and I wouldn’t count my Starbucks run as a business expense — others might be thornier. This is a reminder that maintaining documentation and working with a tax professional can help ensure deductions are both legitimate and properly reported.
4. Business Losses Year After Year
ChatGPT was direct here: “If you run a business (especially a sole proprietorship on Schedule C) and consistently show losses, the IRS may question whether it’s a legitimate business or a hobby.”
The IRS applies “hobby loss” rules under Section 183 of the Internal Revenue Code. Generally, an activity is presumed to be for profit if it shows a profit in at least three of five consecutive years.
5. Home Office Deduction
Before you panic over the inclusion of this very common deduction, let the AI assure you there are a few easy-to-avoid circumstances that could raise red flags, such as claiming very large square footage or deducting excessive home expenses — especially if they’re inconsistent with your income.
In other words, while you may do your best thinking in a giant hot tub, you probably shouldn’t get one and count it as a home office deduction.
6. Independent Contractor Income (1099)
Don’t freak out. If you’re an independent contractor reporting your income accurately and filing your taxes correctly — particularly if you have help from an expert — you’re likely fine. ChatGPT shared that self-employed people may face higher audit rates because of factors such as:
No automatic tax withholding
A higher chance of underreporting
Larger deduction claims
This mention isn’t meant to scare you — only to keep you informed.
7. Early Retirement Account Withdrawals
The AI added that large withdrawals from your 401(k) or IRA could catch Uncle Sam’s eye — and not in a good way — especially if penalties aren’t reported correctly. It’s all the more reason to get help from a professional.
8. Cryptocurrency Transactions
According to ChatGPT, failure to report crypto gains and losses is a “growing audit trigger.” The IRS directly asks about digital asset transactions on Form 1040, so it’s in your best interest to answer truthfully.
The Bottom Line
Being aware of these common red flags can help you get through tax season without the fear of an audit dangling over your head like the sword of Damocles. That said, ChatGPT ended its explanation with a reminder that the IRS uses a computerized scoring system, and returns with higher “risk scores” are more likely to be reviewed. Even then, most audits focus on specific items rather than full investigations.
Take your time, be honest and get help as needed, and you should be fine.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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