Editor’s Note: Tax season is upon us. That stressful time of year when you wonder if your financial wizardry will pass unnoticed or if you’ll receive the dreaded “love letter” from the IRS.

As the April 15 tax deadline looms, many investors are scrambling to get their paperwork in order while secretly praying they won’t be flagged for an audit. While the IRS claims audits are “random,” certain financial moves make you stand out like a Bitcoin billionaire at a soup kitchen.

So, before you test your luck, let’s go over six major audit triggers and how to sidestep them like a seasoned tax ninja.

1. Fudging Your Income (aka The “Who’s Gonna Know?” Approach)

Underreporting income is like leaving a trail of bread crumbs straight to an IRS auditor’s desk. The agency receives copies of your W-2s, 1099s, and other income records. If your tax return doesn’t match their data, expect a not-so-friendly follow-up.

Investors with side hustles, capital gains, or rental income should report everything to avoid turning a simple oversight into a financial nightmare.

How to Avoid It: Keep meticulous records, cross-check 1099s with brokerage statements, and resist the urge to “round down” your gains. The IRS is like a jealous spouse who notices every little discrepancy.

2. Deduction Overload (aka The “Creative Accounting” Syndrome)

Claiming deductions is great, until you start writing off everything from your yacht maintenance to your dog’s obedience classes. The IRS loves to flag excessive deductions that seem too good to be true, especially in areas like charitable contributions, home office expenses, and business losses.

How to Avoid It: Be reasonable. A legitimate home office deduction is fine, but claiming your entire McMansion as a workspace? Not so much. If you’re feeling bold, keep receipts and be ready to justify every deduction.

3. Losses That Look a Little Too Convenient

Investors hate losses, but the IRS gets suspicious when your stock portfolio conveniently tanks every tax season. Capital losses must be genuine, and excessive claiming of “business” losses for what looks more like a hobby can put you under the microscope.

How to Avoid It: Follow the IRS’s hobby-loss rules and ensure your investments are actually for profit. If you have consistent losses but no real business model, the IRS might see your “investment venture” as a glorified pastime.

4. Overly Generous Charitable Donations (aka “Saint Investor Syndrome”)

Charity is great, but if your donations seem more fitting for a Rockefeller than an average taxpayer, the IRS might suspect creative math. Large, disproportionate deductions, especially in non-cash contributions, raise red flags.

How to Avoid It: Keep detailed records, get proper appraisals for donated assets, and avoid inflating donation values. If you really want to be charitable, donate wisely and audit-proof your claims.

5. Unreported Foreign Accounts (aka “Swiss Bank Fantasy”)

In today’s global economy, it’s easy for investors to have overseas accounts. What’s not so easy? Explaining to the IRS why they weren’t disclosed. Failing to report foreign financial accounts (via the FBAR or FATCA requirements) is a surefire way to invite scrutiny and massive penalties.

How to Avoid It: If you have foreign holdings, report them properly. The IRS has gotten exceptionally good at tracking offshore assets, and penalties for failing to disclose can make an audit look like a minor inconvenience.

6. The “Cash-Heavy” Investor Lifestyle

If your tax return claims you made $50,000 last year, but your Instagram shows you partying on a private jet, something doesn’t add up. Investors who deal heavily in cash, e.g. real estate flippers, crypto traders, and collectibles dealers, often get flagged when their reported income doesn’t match their lifestyle.

How to Avoid It: Maintain clear records, report all income, and remember that the IRS doesn’t appreciate financial mysteries. If you’re living large but reporting a small income, expect questions.

With the tax deadline around the corner, now is the time to ensure your return is squeaky clean. Report income accurately, take deductions wisely, and for the love of Warren Buffett, don’t try to outsmart the taxman. Remember, the best way to avoid an audit is to make your tax return so boring that even an IRS agent will fall asleep reading it. Happy filing.

Got a question or comment? Drop John Persinos a line at mailbag@investingdaily.com

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