What Are the Common Red Flags That Trigger an IRS Audit?

An IRS audit begins when the IRS decides to examine a tax return more closely to verify reported income, deductions, credits, or other items. The agency uses automated systems and data-matching along with targeted reviews to identify returns that look risky. While audit selection is not an exact science, several recurring red flags commonly draw attention. Below I explain the main triggers, why they matter, and what you can do to reduce your odds of being selected.

How the IRS selects returns (brief overview)

  • The IRS uses data-matching: employer and payer forms (W-2s, 1099s, K-1s) are compared to what taxpayers report. Discrepancies can generate notices or examinations (IRS data-matching process) (see IRS: How the IRS selects returns to examine: https://www.irs.gov/newsroom/how-does-the-irs-select-returns-to-examine).
  • Statistical scoring: returns are compared to norms for your income level, occupation, and filing history. Outliers get higher scores.
  • Related examinations: an audit of a business, partner, or payer can trigger follow-up audits of related taxpayers.

Top red flags that commonly trigger audits

These items account for a large share of IRS inquiries and audits. Each is followed by what auditors look for and practical steps you can take.

1) Unreported or mismatched income

  • Why it triggers reviews: Payments that payers report to the IRS (W-2, 1099 series, brokerage statements) must generally match what you report. Missing income or discrepancies are easy for the IRS to detect.
  • What auditors check: Matching payer records, bank deposits, and source documents.
  • What to do: Keep records of all income sources, including side gigs and brokerage transactions. Reconcile your records to all 1099s and W-2s before filing.

2) Excessive or unusual deductions for your situation

  • Why it triggers reviews: Large charitable gifts, unusually high business expenses, or home-office and vehicle deductions that seem inconsistent with reported income raise questions.
  • What auditors check: Receipts, contemporaneous logs, payroll records, and substantiation for the amounts claimed.
  • What to do: Only claim deductions you can document. For business expenses, keep receipts, mileage logs, and invoices. For charitable giving, collect written acknowledgments for gifts over $250 and retain bank or credit-card records that trace the donation.

3) Business losses or repeated losses for sole proprietors

  • Why it triggers reviews: Multiple years of reported business losses—especially if they reduce taxable income substantially—can lead the IRS to question whether the activity is a profit-motivated trade or a hobby (hobby-loss rules under IRC Sec. 183).
  • What auditors check: Profit-and-loss trends, business plans, advertising, and other evidence showing the intent to make a profit.
  • What to do: Treat a business like a business—separate bank accounts, documented business plans, marketing, and regular financial records.

4) Large cash transactions and cash businesses

  • Why it triggers reviews: Cash-intensive businesses (restaurants, construction, salons) have higher audit rates because cash is harder to trace.
  • What auditors check: Bank deposits vs. reported receipts, point-of-sale records, and receipts for expenses.
  • What to do: Deposit cash regularly, keep POS reports, and document daily sales reconciliations.

5) Claiming the Earned Income Tax Credit (EITC) or other refundable credits incorrectly

  • Why it triggers reviews: Refundable credits produce large refunds and historically have a higher error rate. The IRS scrutinizes eligibility (relationship, residency, income tests) closely.
  • What auditors check: Third-party records, copies of school records, custody agreements, and supporting documentation for qualifying children.
  • What to do: Confirm eligibility before claiming credits. Save documentation showing residency and relationship if claiming dependents.

6) High-income taxpayers and unusual investments (e.g., crypto)

  • Why it triggers reviews: Higher incomes often correlate with more complex tax situations; new asset classes like cryptocurrency have become audit priorities because reporting has lagged payer reporting.
  • What auditors check: Exchange records, Form 1099-K/1099-B vs. reported gains, and source-of-funds documents.
  • What to do: Report all transactions, keep exchange and wallet records, and reconcile cost basis calculations.

7) Large, inconsistent charitable contributions or asset donations

  • Why it triggers reviews: Deductions that jump sharply year-over-year can prompt questions about valuation and timing for noncash gifts.
  • What auditors check: Appraisals for donated property, charity acknowledgments, and evidence of fair market value.
  • What to do: Use qualified appraisals for high-value noncash donations and document all gifts with acknowledgement letters and receipts.

8) Round numbers and altered documents

  • Why it triggers reviews: Excessive rounding of amounts or documents with edits or inconsistencies may signal fabricated or reconstructed records.
  • What auditors check: Original source documents and corroborating records.
  • What to do: Keep original invoices and bank statements; avoid submitting altered or recreated documents.

Less obvious triggers

  • Filing amended returns can draw attention if they materially change taxable amounts—especially if they create larger refunds.
  • Significant shifts in income or deductions from prior years (even if explained) may prompt a closer look.
  • Claiming uncommon credits, like the fuel tax credit or large R&D credits, without strong support.

Types of audits you might face

  • Correspondence audit: The IRS asks for additional documents by mail. This is the most common and often easiest to resolve. For more on this, see our guide on correspondence audits and how to respond.
  • Office or field audit: The IRS may request that you bring records to a local office or send an agent to your home or place of business. Our Field Audit Survival Guide shows how to prepare for interviews and document requests.

Practical recordkeeping and filing best practices

  • Reconcile all 1099s and W-2s against your own records annually.
  • Keep a logical, labeled file system (paper or digital) with receipts, invoices, bank statements, and logs. See our internal post on Small Business Recordkeeping Best Practices to Avoid Audits for templates and retention timelines.
  • Use accounting software for business income and expenses; export reports that support totals on your tax return.
  • Preserve supporting documents for at least three years (IRS usually recommends three years from date you filed, but six years may apply for substantial understatements). See IRS guidance on recordkeeping (IRS: https://www.irs.gov/taxtopics/tc301).

What to do if you receive an audit notice

  1. Don’t panic. Read the notice carefully and note deadlines.
  2. Confirm it’s legitimate—IRS notices come by mail; the IRS will not initiate an audit by phone. (If you suspect a scam, see IRS: https://www.irs.gov/newsroom/tax-scams-consumer-alerts.)
  3. Gather the requested documents and avoid volunteering extra information beyond what is asked.
  4. Consider hiring a CPA, EA, or tax attorney—especially for field exams or legal disputes. In my practice, early engagement with a tax professional often prevents unnecessary escalation.
  5. If you disagree with an audit result, you may appeal through the IRS Office of Appeals. You can also request a conference with an examiner or seek mediation.

Common misconceptions

  • “Only high earners are audited”: While higher incomes are audited more often, audits occur across income levels—particularly when returns contain red flags.
  • “If I have receipts I won’t get audited”: Documentation reduces risk and improves outcomes, but it does not prevent selection.
  • “An audit always means you’ll owe taxes”: Many audits close with no change or result in taxpayer-favorable adjustments.

My practical checklist to reduce audit risk (from 15+ years advising clients)

  • Run an income vs. deduction sanity check: Do your deductions reasonably match your lifestyle and business size?
  • Reconcile all third-party forms before filing.
  • Use conservative and well-documented estimates for mileage and business use.
  • Keep contemporaneous records (mileage logs, invoices dated at time of transaction).
  • When in doubt, consult a qualified tax preparer and ask for an audit-protection discussion.

Final notes and sources

An audit can be time-consuming, but good records and honest, consistent reporting are your strongest defenses. The IRS explains selection processes and recordkeeping expectations on its website (IRS: How the IRS selects returns to examine, https://www.irs.gov/newsroom/how-does-the-irs-select-returns-to-examine). The National Taxpayer Advocate and IRS publications provide additional guidance on taxpayer rights and audit procedures (National Taxpayer Advocate: https://taxpayeradvocate.irs.gov).

Professional disclaimer: This entry is educational and not individualized tax advice. For advice specific to your situation, consult a licensed CPA, enrolled agent, or tax attorney.

Author note: In my work advising individuals and small businesses for over 15 years, I’ve seen the same avoidable documentation gaps trigger most examinations. Proactive recordkeeping and conservative, well-supported deductions drastically reduce stress and exposure during an IRS review.