Top 6 reasons your investments may trigger an IRS audit

1. Real estate deductions
If you’ve invested in real estate and you manage it yourself, you’ll be writing off legitimate expenses related to the rental property – such as repairs, depreciation and advertising expenses. However, problems arise when property owners get aggressive, writing off too much for the property or claiming deductions that they shouldn’t be able to deduct.

Large mortgage deductions that seemed out of line, could cause an IRS Audit. And taking a large loss on farmland as a potential red flag for the IRS, as well.

While the IRS gives landlords some latitude in claiming deductions, it’s not carte blanche, and real estate investors will need to substantiate deductions if the IRS knocks on their door.

2. Missing dividends and interest
Forget to include all of the dividends and interest from your banks and brokerages? That might make the IRS curious, especially if the amount is material. But even if you have made an error, you might not need to sweat.

Many of our customers had received IRS notice for some income not reported in their tax return, often an innocent mistake of overlooking a 1099 for bank interest or stock dividends. Those are easily corrected. The IRS may simply correct the deficiency and deduct the extra from the return you filed, or if the tax exceeds your refund check, you’ll be asked to cough up more money.

But the IRS may not look so kindly on a much larger 1099 that goes missing. The unreported income could possibly trigger a further in-depth audit.

3. Missing capital gains
If you sell a stock or other security and you’ve earned a profit on it, congratulations – but you now have a capital gain. You will owe tax on that gain and the rate depends on whether you held the security for more than a year as well as your total taxable income.

Taxpayers ordinarily note a capital gain on Schedule D of their return, which is the form for reporting gains on losses on securities. If you fail to report the gain, the IRS will become immediately suspicious. While the IRS may simply identify and correct a small loss and ding you for the difference, a larger missing capital gain could set off the alarms.

While your brokerage will send you a tax form that records your gains and losses, you’re on the hook for properly reporting them to the IRS. And it’s easy to forget to report them for accounts that you check infrequently.

Finally, don’t assume that you can skip reporting a capital gain because the broker’s year-end tax report was delivered late. If you file your taxes too early and don’t report the gain, you’ll have to file an amended return and explain to the IRS what happened.

4. Failure to report cryptocurrency
Cryptocurrency is a big area for enforcement right now. So if you trade, hold or use any cryptocurrency, you may be a target for audit or a compliance check, he says.

Annual tax returns now require you to state whether you’ve transacted in digital assets, and the question appears right at the top of Form 1040, so it’s tough to say you didn’t see it. Failure to report that you’ve owned or traded any digital currency or NFT could land you in hot water.

But other crypto-related matters could also have you running afoul of the law. For example, you may have a tax liability on any capital gains you’ve made, even if you’ve simply spent digital currency on goods and services and not actually traded it.

You’ll have to be extra vigilant, because many brokers or exchanges may not be diligent about sending 1099 forms reporting gains and losses to the IRS. And if you’re spending crypto, you may have to keep your own records and figure your tax liability.


5. Misfiled employer stock options
The tax issues surrounding employer stock options can be tricky, to say the least. In many cases, employees are reporting little to no gains on them, so they may think they don’t need to report it. In fact, it’s common for the taxpayer to not report the sale, but that’s a big no-no.

Here’s what often happens: an employee may be granted options as a perk. When employees want to exercise those options, they put up the money and buy the stock at the agreed-upon price. Many times, employees will simply turn around and sell the stock. However, they often fail to report the exercise price of the options, which is the correct cost basis for figuring the taxable gain.

This common options strategy still requires reporting of a sale on a tax return even though there is little to no gain or loss. Although this is a fixable problem by ultimately reporting the correct cost basis, the IRS may initially assume that all of the sale proceeds are short-term gains even though they may not actually be taxable at all.

If you don’t report the cost basis, the IRS just assumes that the basis is $0 and so the stock’s sale proceeds are fully taxable, maybe even at a higher short-term rate. The IRS may think you owe thousands or even tens of thousands more in taxes and wonder why you haven’t paid up.

6. Filing late
The IRS wants to be paid, and it wants to be paid on time. That can be difficult for investors sometimes, especially when some investments may be complicated or year-end statements may arrive late in the tax season. In fact, it’s not uncommon for some companies to report tax information into April or even beyond the typical April 15th tax deadline.

While an investor’s tax returns may be more complicated than the average return, the IRS still wants a timely filing. And by obliging them, you’ll stay off their radar and attract less attention.


For those investing in real estate, keep track of all your rental expenses and deductions.

And finally just because you have a large deduction doesn’t mean you shouldn’t claim it, even if you think it looks a little unusual. You need to be able to back up the numbers you have put forth to the IRS.

That can be trickier for real estate than for publicly traded stocks. While losses for stocks will be included on a broker’s tax statement, that may not always be the case for real estate expenses. You’ll likely need to hang on to receipts from a variety of stores or independent contractors.

Bottom line
Any deduction or new source of income creates another potential point of interest for the IRS. So in addition to the usual sources of concern such as common deductions and missing income, investors should also conscientiously note income from their stocks, bonds and real estate, among other kinds of investments. But like all taxpayers, they’ll also want to do the little things that keep the IRS from suspecting something is amiss.

We constantly update our knowledge and keep ourselves current with the latest tax laws and develop new techniques to save our clients the most money on their taxes. Click here to check the Credentials and Qualifications for Tax preparation experts.

Lakeline Tax provides tax preparation services for everyone including Individual Tax PreparationBusiness Tax PreparationSelf-Employed Tax PreparationPartnership & Corporate Taxes, Bookkeeping, and Tax Resolution, serving Austin, Cedar Park, Leander, Liberty Hill, and surrounding cities, along with all 50 states. We utilize QuickBooks and are certified QuickBooks ProAdvisors. Get more done with us.