These are transactions the IRS has identified as potentially abusive. They’re the same or substantially like those that the IRS has determined to be a tax-avoidance transaction.

This is a list published annually by the IRS highlighting common tax scams and abusive transactions. Tax professionals advising clients on aggressive tax strategies or helping them navigate one of the items on the listed transactions or dirty dozen list have to file a material advisor form. That means the tax professional materially advised the client to do something that’s considered aggressive in the eyes of the IRS. In effect, the form alerts the IRS to scrutinize those clients.

Many taxpayers incorrectly use passive losses to offset active income (like wages). The IRS considers a passive business or trade activity one in which an individual doesn’t materially participate – for example, the individual isn’t involved in the operation on a regular or substantial basis. Popular passive activities include rental real estate, equipment leasing, limited partnerships and limited liability companies. But passive losses can be written off only against passive gains.

Most of the causes behind an audit stem from an error or omission. If a client didn’t include all the income that they received and should report, the government might have questions. In some cases, not all the Form 1099s or K-1s get turned in. This is easy for the IRS to catch because of tax forms that employers and financial institutions send to the agency, such as the aforementioned ones or investment earnings on Form 1099-B. If a client fails to report such income, the IRS will notice the mismatched data.

The IRS is focused on partnerships that don’t pay corporate income taxes. Tiered partnerships, or those that own another one, can provide a way of hiding income.

The 2017 Tax Cuts and Jobs Act, which will expire at the end of 2025, includes a higher federal gift and estate tax exemption, allowing more wealthy Americans to transfer tax-free assets to the next generation. However, those who use aggressive valuation discounts for assets could trigger an audit.