Filing taxes with a modest income might seem like smooth sailing, but don’t be fooled—low-income tax returns can and do trigger IRS audits. In fact, certain red flags are more likely to raise scrutiny when income is low, precisely because they can look suspicious against a small financial backdrop.
Here are the top five audit triggers to watch out for on a low-income return:
1. High Earned Income Tax Credit (EITC) Claims
The Earned Income Tax Credit is a powerful tool for qualifying taxpayers—but it’s also one of the most audited items on low-income returns. Because it’s refundable (meaning you can receive more money than you paid in taxes), the IRS keeps a close eye on EITC filings.
Common mistakes that raise red flags:
- Claiming children who don’t meet residency or relationship tests
- Incorrect income reporting to maximize the credit
- Filing as Head of Household when not eligible
Tip: Ensure documentation is airtight—proof of residency, relationship, and earned income are key.
2. Questionable Business or Self-Employment Income
A Schedule C (Profit or Loss from Business) on a low-income return is almost guaranteed to catch attention—especially when it shows little to no income but significant deductions. The IRS knows that some may use fictitious businesses to inflate expenses and reduce taxable income—or worse, fabricate losses to qualify for credits.
Audit triggers include:
- Consistent losses over several years
- Large deductions with no income
- No 1099s or business receipts to support activity
Tip: Keep detailed logs, receipts, and proof of legitimate business operations.
3. Large Charitable Contributions Relative to Income
The IRS uses algorithms to compare deductions to income levels. If someone earning $25,000 claims $10,000 in charitable donations, that’s going to raise eyebrows.
Why it’s a red flag:
- It doesn’t match expected giving capacity
- The IRS may suspect inflated or non-cash donations without proper appraisal
Tip: For non-cash contributions over $500, file Form 8283 and keep donation receipts and fair market value documentation.
4. Mismatch Between Reported Income and Third-Party Documents
Even small discrepancies can lead to audits. If the IRS receives W-2s or 1099s that don’t match what’s reported on your return, that’s an automatic trigger.
Watch out for:
- Forgetting to report freelance or gig work income (like from Uber, DoorDash, or Etsy)
- Overlooking interest, dividends, or small 1099-INTs or 1099-DIVs
Tip: Use IRS transcripts or a tax software import to ensure nothing is missed.
5. Unusual Filing Status or Dependents
Choosing Head of Household or claiming dependents not previously listed can bring a return under scrutiny—especially if custody or support agreements are unclear or contested.
Common triggers:
- Two parents both claiming the same child
- Claiming unrelated dependents without clear ties
- Fluctuating between filing statuses year to year
Tip: Be ready to show birth certificates, school records, or legal documents verifying dependents and your right to claim them.
Final Thoughts
You don’t need to be wealthy to face an audit. In fact, the IRS tends to focus on returns where refundable credits or deductions are inconsistent with reported income. The best defense? Accuracy, documentation, and a firm understanding of the rules.
If you’re ever unsure, consider working with a certified tax professional. A little expert insight today can save you from a big headache tomorrow.
KC Tax Tamer 