The thought of an IRS audit can strike fear into the hearts of taxpayers, but understanding what triggers an audit can help you avoid red flags and stay compliant. An IRS audit is an examination of your financial information and tax return to ensure everything is accurate and complete. Although most returns are accepted without issue, the IRS does audit a small percentage of taxpayers each year—either randomly or due to suspicious activity. This blog explores the most common audit triggers and how you can avoid them.
Types of IRS Audits
Before diving into the triggers, it’s important to understand that the IRS conducts different types of audits:
- Correspondence Audit: The most common and least intrusive, conducted via mail for minor issues or document requests.
- Office Audit: Conducted at a local IRS office, typically for more complex issues.
- Field Audit: The most comprehensive, conducted at your home, business, or accountant’s office by an IRS agent.
1. High Income
One of the biggest factors that increases audit risk is having a high income. The IRS pays more attention to taxpayers who report $200,000 or more in income annually. Those making over $1 million face a significantly higher audit rate than the average taxpayer. This is because high earners often have more complex financial situations and greater opportunity for underreporting income or taking aggressive deductions.
2. Discrepancies Between Reported Income and Forms Received
The IRS receives copies of your W-2s, 1099s, and other information forms directly from employers, banks, and financial institutions. If your return doesn’t match the data the IRS already has, it may trigger an automated notice or full audit. Always ensure the numbers you report exactly match your official tax documents.
3. Large Charitable Contributions
Claiming substantial charitable deductions—especially when they appear disproportionate to your income—can raise suspicion. The IRS uses statistical norms to flag returns. If the average person in your income bracket donates 2–3% of income and you claim 25%, expect scrutiny. Be sure to have documentation for all donations, especially non-cash contributions like furniture or clothing.
4. Excessive Business Expenses or Losses
If you file a Schedule C (Profit or Loss from Business) and report large deductions relative to your income, the IRS may suspect you are inflating expenses or disguising a hobby as a business. Repeated years of business losses, especially in a side gig, are also a red flag. To avoid audit risk, maintain clear and accurate records of all business expenses and ensure your business operates with a profit motive.
5. Claiming the Home Office Deduction
The home office deduction is legitimate, but often abused. If you claim a home office, it must be a space used exclusively and regularly for business. Using your guest room or kitchen table may not qualify. The IRS is wary of abuse and may audit returns where this deduction seems unjustified. Keep diagrams, photos, and records to support your claim if needed.
6. Earned Income Tax Credit (EITC) Claims
The EITC is a valuable benefit for low- to moderate-income workers, but due to frequent misuse and errors, it is heavily scrutinized. If you qualify and claim the credit, make sure your filing status, income, and number of dependents meet IRS criteria. Improperly claiming the EITC can lead to audits and even future disqualification from claiming the credit.
7. Cash-Intensive Businesses
Businesses that typically handle a lot of cash—such as bars, salons, taxi services, or laundromats—are subject to higher audit risk. Cash transactions are harder to trace, making underreporting more tempting. The IRS uses undercover operations, lifestyle analysis, and bank deposit comparisons to uncover discrepancies. Keeping detailed logs and using business bank accounts are essential to remain audit-proof.
8. Offshore Accounts and Foreign Income
Taxpayers with foreign bank accounts or income are subject to additional reporting requirements (like FBAR and FATCA). Failure to report foreign assets or income accurately can trigger a major audit and significant penalties. If you have assets abroad, work with a professional to meet all reporting rules.
9. Math Errors and Incomplete Forms
Simple errors like arithmetic mistakes, incorrect Social Security numbers, or leaving out required forms can draw unwanted attention. These errors may lead to automated letters or audits depending on the severity. Double-check your work or use tax software to avoid careless mistakes.
10. Random Selection and Computer Scoring
Sometimes, audits are completely random or based on the Discriminant Information Function (DIF) score, which compares your return to similar ones statistically. If your return deviates from the norm, it may receive a higher DIF score and be flagged for audit—even if no errors are evident. This makes filing an accurate and well-documented return even more important.
11. Rounded Numbers and Estimates
Claiming too many perfectly rounded numbers—such as $500 for supplies, $3,000 for mileage, or $2,000 for advertising—can raise eyebrows. It suggests that you’re estimating rather than keeping real records. Use exact numbers and retain receipts to back up your deductions.
12. Alimony Deduction Mistakes
For divorces finalized before 2019, alimony payments are deductible by the payer and must be reported as income by the recipient. Inconsistent reporting between both parties can prompt an audit. After 2018, the TCJA eliminated this deduction for new agreements, so make sure your treatment of alimony aligns with the date and terms of your divorce.
13. Cryptocurrency Transactions
As digital currency grows in popularity, the IRS has ramped up enforcement. Failing to report cryptocurrency transactions, even small ones, can be problematic. Every time you sell, exchange, or use crypto, it’s potentially a taxable event. Answer the crypto question on Form 1040 honestly and keep detailed records of all transactions.
How to Avoid an Audit
While you can’t always avoid an audit, there are steps you can take to reduce your chances and prepare for scrutiny:
- Report all income, including 1099s and side gigs
- Use exact figures, not estimates
- Keep receipts and organized records for at least 3 years
- Avoid aggressive deductions that don’t align with your income
- Consider e-filing to reduce math or transcription errors
- Hire a CPA if your finances are complex
What Happens If You’re Audited?
If selected for an audit, the IRS will send you a letter (never call or email). The notice will explain the type of audit, the years involved, and the documents they require. You will have the opportunity to provide supporting documentation or make corrections. If the IRS finds an error, you may owe additional taxes, penalties, or interest—but you can also appeal the decision if you disagree.
Conclusion: Know the Triggers, File with Confidence
While the idea of an audit can be intimidating, knowledge is your best defense. Understanding what triggers audits empowers you to file accurate, honest returns backed by documentation. Most taxpayers are never audited, but those who are typically fall into one of the red-flag categories. Keep excellent records, report income fully, and when in doubt, consult a tax professional to ensure your return meets all IRS expectations and minimizes your audit risk.
