Overview

A field audit is the most intensive kind of IRS examination: an agent visits your business or home to review original records, leases, and supporting documents. While only a small share of returns are audited, small rental owners can attract attention because rental activity involves many judgment calls—depreciation, repairs vs. improvements, personal use, and passive loss rules (IRC §469). The IRS explains its audit process and matching programs on its website (see IRS audits guidance).

Common triggers and why they matter

  • Large or repeated losses on Schedule E: Claiming substantial rental losses year after year—especially when the property appears to operate like a business—raises flags. Passive activity rules limit loss claims; see IRS Publication 925 for details (Passive Activity and At-Risk rules).

  • Mismatched information returns: Third-party reports (bank records, 1099‑K, 1099‑MISC) are matched against your return. If platforms report payments the return omits, that commonly prompts audits (IRS information reporting).

  • Unusually high deductions relative to income: Excessive repairs, travel, or contractor payments (especially without invoices) invite scrutiny. The IRS looks for outliers compared with industry norms.

  • Incorrect schedule choice or misclassification: Reporting rental income on the wrong schedule (Schedule C vs Schedule E) or misclassifying personal vs. rental use can trigger examination. Proper filing on Schedule E and accurate Form 4562 depreciation records matter.

  • Related enforcement leads: Complaints, criminal referrals, or previous compliance issues increase selection probability.

  • Red flags in comparable market data: Reporting rents far below or above market without documentation can lead to questions about unreported income or subsidized occupancy.

How the IRS selects returns

The IRS uses automated screening, data‑matching, and risk scores to select returns for review. Information‑return matching (1099s, W‑2s, 1098s, 1099‑K) is a common source of leads; discrepancies often trigger correspondence or in‑person exams. For general procedures, see the IRS audits page.

Practical recordkeeping and documentation (what to keep)

Good records cut audit risk and shorten any examination. Keep:

  • Signed leases and tenant communications
  • Bank statements, deposit records, and platform payout summaries
  • Invoices, receipts, and canceled checks for repairs, supplies, and contractor work
  • Mileage logs for trips directly related to the rental
  • Depreciation schedules, closing statements, and Form 4562
  • Records of personal use that support allocation of expenses

See our guide on Recordkeeping for Taxes: Documents to Keep and How Long for retention periods and examples.

Actions that reduce audit likelihood

  • Report all income exactly as shown on information returns and platform statements.
  • Use reasonable, market‑based rent and document how you set rates (comps, listings).
  • Substantiate deductions with contemporaneous receipts and independent invoices.
  • Review returns with a CPA or enrolled agent if you claim large losses or make unusual elections. In my practice advising rental owners, a pre‑file review often prevents errors that lead to audits.

If you receive an audit notice

  • Read the notice carefully and note deadlines. The IRS will state whether the exam is correspondence, office, or field. A field audit means the agent will ask to visit your property or review records on site.
  • Respond on time and assemble requested documents; don’t provide more than asked without guidance.
  • Consider professional representation — a CPA, EA, or tax attorney can communicate with the agent and help limit exposure.
  • If you disagree with audit findings, you can appeal within the IRS or request an Appeals Office review.

Related resources

  • Schedule E (Supplemental Income and Loss) — use this when reporting most rental income and expenses.
  • Preparing for an IRS Field Audit: Residential Property and Rentals — step‑by‑step checklist for on‑site examinations.
  • Recordkeeping for Taxes: Documents to Keep and How Long — retention rules and sample lists.

Authoritative sources

Professional disclaimer

This article is educational and not individualized tax advice. Rules change and facts matter—consult a qualified tax professional for advice tailored to your rental properties.