Getting audited by the IRS is one of those financial fears most people never want to face. While audits are relatively rare, certain mistakes or patterns on your tax return can increase your chances of getting flagged.
The good news? Most audits can be avoided by staying accurate, organized, and honest. Here are the 12 biggest audit red flags — and how to fix or prevent them.
1. Underreporting Income
Mistake: Not reporting all income, especially side gigs or freelance work.
Fix: The IRS gets copies of all your W-2s and 1099s, so make sure you report every dollar. If you receive cash or payments through apps like PayPal or Venmo for business purposes, include those too.
2. Excessive Deductions Compared to Income
Mistake: Claiming unusually high deductions relative to what you earn.
Fix: Keep all receipts and documentation for major write-offs. The IRS compares your deductions to national averages for your profession — large outliers can trigger scrutiny.
3. Claiming a Home Office Improperly
Mistake: Writing off your entire home or general living expenses.
Fix: The home office deduction only applies to areas used exclusively and regularly for business. Measure the space accurately and only deduct the appropriate percentage of utilities, rent, or mortgage interest.
4. Reporting Round Numbers
Mistake: Listing too many clean, rounded numbers like $1,000 or $500.
Fix: Real expenses are rarely that neat. Use exact figures from receipts and records — rounded numbers can make your return look estimated or careless.
5. Large Charitable Deductions Without Proof
Mistake: Donating a lot without documentation.
Fix: Always keep written receipts or acknowledgment letters for donations over $250. Non-cash donations (like furniture or clothing) should be properly valued using IRS guidelines or appraisal tools.
6. Misclassifying Workers or Business Expenses
Mistake: Mixing personal and business expenses or mislabeling contractors.
Fix: Separate your business and personal finances. Issue 1099s to contractors and track deductible expenses carefully. A clear paper trail helps prove legitimacy.
7. High Cash Businesses
Mistake: Operating a business that handles a lot of cash and not keeping good records.
Fix: Keep detailed logs of all income and deposits. The IRS pays extra attention to industries like restaurants, salons, or car washes, where underreporting is common.
8. Claiming Too Many “Business” Losses
Mistake: Reporting losses year after year without profit.
Fix: The IRS may reclassify your activity as a hobby instead of a business. To stay compliant, show a profit at least 3 out of 5 years, and keep clear documentation of efforts to earn income.
9. Overstating Earned Income Tax Credit (EITC)
Mistake: Claiming dependents or income levels incorrectly.
Fix: Double-check EITC rules before filing. Errors (intentional or not) can result in multi-year bans from claiming the credit in the future.
10. Failing to Report Foreign Accounts
Mistake: Ignoring income or balances held abroad.
Fix: U.S. citizens must report foreign bank accounts exceeding $10,000 via the FBAR form. Noncompliance can result in severe penalties — even if unintentional.
11. Inconsistent Reporting Year to Year
Mistake: Having drastic, unexplained changes in income or deductions.
Fix: If your situation changes significantly (new job, home, or business), be ready to document why. Consistency and accuracy build trust with the IRS system.
12. Math Errors or Sloppy Returns
Mistake: Simple mistakes that cause red flags automatically.
Fix: Double-check your return — or better yet, e-file with tax software that verifies calculations for you. Even small math mistakes can trigger reviews or delays.
Final Thoughts
IRS audits are less about fear and more about accuracy and honesty. By keeping clean records, avoiding exaggerated deductions, and staying consistent, you dramatically reduce your audit risk.
If you do receive an IRS notice, don’t panic — most audits are correspondence-based and easily resolved with documentation. The best audit defense is simple: be organized, truthful, and prepared.