Quick overview

The IRS examines a small share of tax returns to ensure compliance and close the tax gap. While audits are relatively uncommon, certain patterns and discrepancies raise the odds your return will be selected. Understanding the most common triggers helps you file defensively, keep the right documentation, and respond promptly if the IRS reaches out.

(Official IRS guidance on how returns are selected is available at the IRS website: https://www.irs.gov/credits-deductions/how-irs-selects-returns-for-examination.)

How does the IRS choose returns for audit?

The IRS uses a mix of automated scoring systems, information-matching, and targeted programs. Two key methods are:

Besides those systems, the IRS runs targeted campaigns (for example, international transactions, crypto reporting, or EITC reviews) and conducts random audits.

Common red flags that increase audit risk

Below are the most frequent triggers I’ve seen in 15+ years of tax practice and education. Each item includes why it matters and what records to keep.

1) Income mismatches and missing reporting

  • Why it triggers audits: The IRS cross-references the income you report with third-party forms like W‑2s, 1099‑MISC/NEC, 1099‑K, and brokerage 1099s. Discrepancies prompt automated notices or further review.
  • Records to keep: Copies of W‑2s, 1099s, brokerage statements, payment-app histories, bank statements, and correspondence showing corrected forms.

2) Excessively high deductions for your income level

  • Why it triggers audits: Deductions far above what is typical for your filing profile look like outliers to scoring systems.
  • Records to keep: Receipts, invoices, canceled checks, and a short explanation of business purpose for each major deduction.

3) Schedule C (self‑employment) losses and large business deductions

  • Why it triggers audits: Schedule C filers have broad discretion in reporting income and expenses. Repeated losses or large home-office, vehicle, or meals deductions attract scrutiny.
  • Records to keep: Profit & loss statements, receipts, mileage logs, home-office calculation worksheets, and bank account statements showing business activity.

4) High cash transactions or cash-based businesses

  • Why it triggers audits: Cash businesses are harder for the IRS to trace, so they receive closer attention.
  • Records to keep: Daily sales logs, deposit records, invoices, and point-of-sale reports.

5) Large or unusual charitable donations

  • Why it triggers audits: Very large donations relative to income, or claims for non-cash donations without proper valuation support, raise red flags.
  • Records to keep: Written acknowledgments from charities, detailed appraisal reports for high-value gifts, and Form 8283 when required.

6) Claiming the Earned Income Tax Credit (EITC)

7) Cryptocurrency transactions

  • Why it triggers audits: Crypto transactions generate new reporting lines and matching opportunities. The IRS has increased enforcement and informational requests.
  • Records to keep: Exchange statements, wallet records, transaction histories, cost-basis calculations, and records of conversions to fiat. See our related article: “How to Report Cryptocurrency Income and Avoid Audits.” (https://finhelp.io/glossary/how-to-report-cryptocurrency-income-and-avoid-audits/)

8) Rental and passive income issues

  • Why it triggers audits: Losses on rental activity, real estate professionals claiming business losses, or incorrectly treating a hobby as a business invite scrutiny.
  • Records to keep: Lease agreements, rent ledgers, repair and maintenance receipts, mortgage interest statements, and advertising records.

9) Unusually large refunds or credits

  • Why it triggers audits: Refunds that are large relative to the return’s figures—especially from refundable credits—are checked more closely.
  • Records to keep: Documentation supporting credits claimed and the calculations used.

10) Repeated math errors or amendments

  • Why it triggers audits: Patterns of mistakes, frequent amended returns, or late reporting can lead to closer review.
  • Records to keep: Prior-year returns, corrected forms, and communications explaining amendments.

Types of audits and what to expect

  • Correspondence audit: The IRS asks for documents by mail. This is the most common and usually limited in scope. (See our guide: “Preparing for an IRS Correspondence Audit: What to Expect and How to Respond.” https://finhelp.io/glossary/preparing-for-an-irs-correspondence-audit-what-to-expect-and-how-to-respond/)
  • Office audit: You meet an IRS examiner at a local IRS office and present records.
  • Field audit: An IRS agent visits your home, place of business, or accountant’s office for a detailed review. These are more intensive.

What to do if the IRS contacts you

  1. Read the notice carefully and note deadlines. Don’t ignore IRS letters; they will escalate.
  2. Gather organized documentation that directly supports the items on the notice.
  3. Consider professional representation. If you don’t want to speak with the IRS, you can appoint a representative using Form 2848. Our guide explains how to use a Power of Attorney during audits. (https://finhelp.io/glossary/using-a-power-of-attorney-form-2848-during-an-audit-or-appeal/)
  4. Meet deadlines and send copies, not originals, unless the IRS explicitly requests originals.
  5. If you disagree with adjustments, use the Appeals process or seek a Tax Court remedy. Keep communication professional and documented.

Documentation checklist (practical quick list)

  • W‑2s, 1099s, 1098s, brokerage 1099s
  • Bank and credit-card statements
  • Receipts and invoices for major deductions
  • Mileage logs (date, purpose, miles)
  • Lease agreements and rent records
  • Charitable acknowledgment letters and appraisals
  • Contracts, timesheets, payroll records

Common misconceptions

  • Misconception: “An audit means I’m a criminal.” Reality: Most audits are civil reviews; only a tiny fraction involve criminal investigation.
  • Misconception: “Filing late increases audit risk significantly.” Reality: Filing late can increase notices and interest/penalties, but selection is more commonly driven by data mismatches and unusual items.
  • Misconception: “If I’m chosen, I must go to Tax Court.” Reality: Many audits are resolved by documentation or negotiation without court involvement.

Time limits and important deadlines

  • General statute of limitations: The IRS generally has three years from the due date or filing date to assess additional tax. (IRS: https://www.irs.gov/taxtopics/tc152)
  • Substantial omission: Six years if income omitted exceeds 25% of gross income.
  • No statute for fraud or unfiled returns: If you didn’t file or committed fraud, there may be no time limit.

Preventive measures — practical steps I use with clients

  • File accurate returns and report all income. Keep a simple folder (digital or physical) for each tax year.
  • Use conservative, defensible estimates for deductions; document methodology.
  • Use accounting software for businesses to create clear P&L reports and reconciliations.
  • Reconcile third‑party forms before filing (e.g., confirm 1099 totals match bank deposits).
  • When in doubt, seek a second opinion from a CPA or enrolled agent.

In my practice, careful recordkeeping and pre‑filing checks reduce audit stress for clients. Often a short explanation and supporting documents resolve questions quickly.

When to get professional help

If an audit involves complex issues—large business adjustments, international transactions, potential fraud flags, or significant penalties—hire a qualified tax professional or an attorney. Professionals who represent taxpayers before the IRS understand procedural defenses, penalty abatement paths, and the appeals timeline.

Useful authoritative sources

Disclaimer: This article is educational and not individualized tax advice. For your specific situation, consult a licensed tax professional, enrolled agent, or tax attorney.

If you want help gathering an audit file or preparing responses, see our related guides linked above for sample checklists and step‑by‑step templates.