No one wants an IRS audit — but understanding what triggers one can help you avoid it. While most tax returns are processed automatically, certain mistakes or patterns can draw extra attention. Knowing these audit red flags helps you file with confidence and accuracy.
What Is a Tax Audit?
A tax audit is a review by the IRS to verify that your income, deductions, and credits are accurate. It doesn’t always mean you did something wrong — sometimes it’s just a random check or a data mismatch.
Example:
If your employer reports $60,000 in wages and you report $55,000, that difference could trigger an audit notice.
How Common Are Audits?
Audits are less common than most people think. The IRS audits less than 1% of individual returns each year, focusing mainly on high-income earners and returns with inconsistencies or excessive deductions.
Still, even a small risk is worth avoiding — especially when the fix is simple: file accurately, keep documentation, and understand what looks suspicious.
Common IRS Audit Red Flags
- Unreported Income – The IRS receives copies of your W-2s and 1099s. Any mismatch between what you report and what’s filed can trigger a review.
- Large Deductions Compared to Income – Claiming unusually high charitable donations or business expenses can raise questions.
- Home Office Deductions – Legitimate, but often misused. You must use the space exclusively for work.
- Self-Employment Income – Reporting high business losses year after year may look suspicious.
- Cryptocurrency Transactions – The IRS tracks crypto exchanges — failing to report them is a red flag.
- Rounded Numbers – Using only whole numbers instead of exact figures looks imprecise.
- High Income Levels – Returns over $400,000 have a higher likelihood of audit.
- Foreign Accounts – Not disclosing overseas income or assets can trigger serious scrutiny.
- Earned Income Tax Credit (EITC) Claims – Often audited due to frequent filing errors.
- Early Retirement Withdrawals – Unreported or improperly coded IRA or 401(k) withdrawals can cause flags.
Pros of Knowing Audit Red Flags
1. Reduces Anxiety
Understanding what to avoid makes filing less stressful.
2. Helps You File Accurately
You’ll double-check high-risk areas before submitting.
3. Keeps Documentation Organized
You’ll develop habits that make audits easier to handle if they ever happen.
4. Builds Trust with Tax Preparers
Clear, accurate reporting helps your CPA or tax software work effectively.
5. Saves Time and Money
Avoiding audit triggers reduces the risk of penalties or costly disputes.
Cons of Ignoring Audit Risks
1. Higher Audit Probability
Sloppy or inconsistent reporting can easily get flagged.
Fix: Always cross-check your W-2s and 1099s before filing.
2. Potential Penalties
If errors lead to underpayment, you could face fines or interest.
Fix: File accurately and on time.
3. Stress and Lost Time
An audit can take weeks or months to resolve.
Fix: Keep receipts, invoices, and documentation for at least three years.
4. Delayed Refunds
Returns flagged for review may take longer to process.
Fix: Avoid errors that could stall your return.
5. Legal Trouble
Severe discrepancies can trigger investigations.
Fix: Be transparent and proactive with any mistakes.
Best Practices to Avoid IRS Audit Red Flags
1. Report All Income
Include freelance work, side gigs, and investment income.
2. File Electronically
E-filing reduces math errors and speeds up verification.
3. Keep Accurate Records
Save receipts for deductions and business expenses.
4. Be Realistic with Deductions
Only claim expenses that genuinely apply to your work or life.
5. Double-Check Numbers
A small typo can lead to a major red flag.
6. Avoid Mixing Personal and Business Accounts
Keep your finances separate to make tracking easier.
7. Use Reputable Tax Software or Professionals
They often catch errors before you file.
8. Answer IRS Letters Promptly
If contacted, respond clearly and keep copies of correspondence.
9. Stay Honest
Intentional misreporting can lead to penalties or prosecution.
10. Review Before Submitting
Take five extra minutes to review every section — it’s worth it.
Key Takeaway
The best way to avoid an audit is simple: file honestly, document everything, and stay organized. By knowing the IRS red flags ahead of time, you can file your taxes with confidence and peace of mind.