Red Flags for Freelancers and Self-Employed
- Not making quarterly estimated tax payments: If you’ll owe $1,000+ in federal taxes for the year, quarterly payments are required. Missing them triggers underpayment penalties.
- No separate business checking account: Commingling personal and business funds creates audit risk and makes deduction documentation nearly impossible.
- Claiming 100% business use of a vehicle: IRS flags 100% business vehicle use as statistically improbable for most small businesses.
- No mileage log: Vehicle deductions without contemporaneous mileage logs are indefensible in an audit.
Red Flags for W-2 Employees
W-2 employee income tax red flags and actions
| Red Flag | What It Means | Action |
|---|---|---|
| Large tax bill every year ($2,000+) | Withholding is too low | Submit new W-4 increasing withholding |
| Large refund every year ($3,000+) | Withholding is too high | Adjust W-4 to keep money during year |
| Never reviewing your paycheck stub | Missing withholding errors | Review W-4 and paycheck annually |
| Same filing situation for 5+ years with no review | Missing life-change adjustments | Annual tax calculator review |
| Not contributing to employer 401k or HSA | Paying more taxes than necessary | Enroll immediately |
⚠️IRS Audit Red Flags
Common audit triggers: very high charitable contributions relative to income, home office deduction on a rented apartment, large vehicle deductions with no documentation, 100% meal deductions, unreported income (IRS matches 1099s to returns), and claiming the Earned Income Credit repeatedly when not eligible.
Check Your Tax Situation for Red Flags
Enter your income and deductions — identify issues before they become IRS problems.