Tax Red Flags That Trigger an IRS Audit (and How to Avoid Them)

No one wants to receive a letter from the IRS announcing an audit. While audits are relatively rare—affecting less than 1% of taxpayers each year—they can be stressful, time-consuming, and costly if handled poorly.

The good news? Most audits are triggered by specific patterns or mistakes on tax returns. Understanding these red flags can help you file accurately and lower your chances of attracting unwanted attention.

1. Large, Unexplained Income Changes

If your reported income takes a significant leap (or drop) from the prior year without an obvious reason, the IRS may flag your return for closer review.

Tip: Keep documentation ready—such as invoices, contracts, or sales records—if your income changed due to a new job, large sale, or business expansion.

2. Excessive Deductions Compared to Income

The IRS uses statistical models to compare your deductions to those of similar taxpayers. If your write-offs are unusually high for your income level, it could raise questions.

Example: A sole proprietor with $60,000 in income claiming $40,000 in expenses may be audited unless the deductions are legitimate and well-documented.

3. Claiming 100% Business Use of a Vehicle

Claiming that your car is used entirely for business is a classic audit trigger. Even legitimate claims can invite scrutiny.

Tip: Maintain a mileage log with dates, destinations, and purposes of each trip.

4. Home Office Deductions Without Proper Proof

While home office deductions are legitimate, they must meet strict criteria:

• The space must be used exclusively for business

• It must be your principal place of business

Using the deduction for a kitchen table or shared space can create problems.

5. Mismatched or Missing Forms

If income reported by employers, clients, or financial institutions (via W-2s, 1099s, etc.) doesn’t match your return, the IRS will flag it automatically.

Tip: Keep track of all issued forms and verify that amounts match before filing.

6. High Cash Business Activity

Businesses that operate heavily in cash—such as salons, restaurants, or construction services—often draw closer scrutiny. The IRS looks for underreported income in these industries.

Tip: Keep clear daily sales records and deposit all income in a business account.

7. Early Retirement Account Withdrawals

Taking early distributions from an IRA or 401(k) before age 59½ can trigger IRS questions, especially if penalties or exceptions aren’t reported correctly.

Tip: Work with a tax professional to ensure all withdrawals are reported with proper forms and codes.

8. Large Charitable Contributions

If your charitable deductions are disproportionately high compared to your income, the IRS may ask for proof.

Tip: Keep receipts, acknowledgment letters, and appraisals for non-cash donations.

9. Self-Employment Income With No Profit

Reporting business losses year after year can cause the IRS to question whether it’s truly a business or a hobby.

Tip: Make sure your business is run with the intent to make a profit and keep supporting documentation.

10. Foreign Bank Accounts or Assets

Failing to report foreign accounts over certain thresholds can result in steep penalties and audits.

Tip: If you have foreign financial interests, file the required FBAR or FATCA forms.

How to Reduce Your Audit Risk

• File on time and accurately

• Double-check all income, deductions, and credits

• Keep detailed records for at least 3–7 years

• When in doubt, consult a qualified tax professional

Final Word:

You can’t completely eliminate the chance of an IRS audit, but you can drastically reduce your risk by avoiding common red flags and keeping thorough documentation. If you do receive an audit notice, responding promptly and professionally is key to resolving it quickly.