Top IRS Audit Triggers for High-Income, High-Net-Worth Families

As your family’s income and assets increase, so does the likelihood of drawing attention from tax authorities. And with the IRS now using data analytics to help flag returns with certain markers, it’s important to understand the most common audit triggers and ways to manage this risk.

• Audit Trigger #1:Complicated income streams. Receiving income from businesses, partnerships, investments, real estate, and trusts involve different tax forms and rules, increasing the chance of mistakes or inconsistencies.

What you can do: Disorganization is an invitation for audit risk. Keep accurate records and be diligent about receiving and reviewing all relevant tax documents.

• Audit Trigger #2:Significant charitable contributions. Large charitable contributions, especially non-cash donations like real estate or artwork, are a top audit trigger. The IRS wants to ensure that deductions are properly valued and documented.

What you can do: Obtain formal appraisals for large non-cash gifts. Ensure donations are made to qualified charities and that all required forms are attached to your return.

• Audit Trigger #3:Use of private foundations or donor-advised funds (DAFs). Private foundations and DAFs offer strategic ways to manage charitable giving, but they also come with specific compliance requirements. The IRS monitors these vehicles to prevent misuse.

What you can do: Follow the rules around distributions, self-dealing, and allowable expenses. Keep detailed records of all grants and administrative costs, and file all necessary disclosures.

• Audit Trigger #4:High spending relative to reported income. If a tax return shows moderate income but the taxpayer appears to lead a much more expensive lifestyle, it may prompt further inquiry. The IRS may examine whether the taxpayer is underreporting income or relying on untaxed sources.

What you can do: Document any major inflows of wealth that aren’t taxable income, such as inheritances, gifts, or the sale of assets. Be prepared to explain sources of funds if spending appears inconsistent with reported income.

• Audit Trigger #5:Foreign assets & accounts. Owning overseas bank accounts, property, or investments requires careful compliance with IRS reporting rules. This includes the Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR) requirements. The IRS has improved access to foreign financial data and actively monitors for non-disclosure.

What you can do: Report all foreign holdings accurately and on time. File required forms like the FBAR (Form 114) and Form 8938 when applicable. Penalties for non-compliance can be significant.

• Audit Trigger #6:Large business or real estate losses. Losses from businesses or rental real estate can be used to offset other income, but they can raise questions if they’re unusually large or sustained over many years. The IRS may assess whether the activity meets the criteria for being a true business rather than a hobby.

What you can do: Maintain clear records showing active involvement and a reasonable expectation of profit. Understand and comply with passive activity loss rules, and ensure you meet the requirements for material participation.

High-income and high-net-worth families usually face more complicated tax situations. This complexity is what increases audit risk. By staying informed, keeping accurate records, and making tax planning a year-round activity, you can reduce the chance of potential problems and be well-prepared if your return is ever selected for review.