What Is an IRS Audit?
An IRS audit reviews your financial records and tax return to ensure your reported income, deductions, and credits are accurate. While they can happen randomly, some things can trigger an IRS audit. For example, the Internal Revenue Service may find a red flag when looking through a business owner’s tax deductions or when it suspects instances of tax evasion.
The IRS uses a system called DIF (Discriminant Information Function), which scores tax returns based on their likelihood of having errors. When returns have unusually high scores, they may be flagged or trigger an audit.
There are three primary types of audits, which include:
- Correspondence audits are done by mail. They’re the most common and typically limited to specific issues. Usually, taxpayers or small business owners must explain a correction or provide additional support for items (i.e., proof to support deductions on a tax return).
- Office audits are conducted at a local IRS office. Someone will come to your location and conduct an interview or ask for more documentation. This occurs when things are a bit more complex, but still not big enough for a full field audit.
- Field audits are the most in-depth at your home, business, or accountant’s office. It’s pretty comprehensive and conducted by skilled representatives specialized in the industry. These audits can be intrusive and are the most serious form. You’ll likely want to hire a tax attorney for IRS representation for this tax audit.
10 IRS Audit Triggers and Why They Matter
The IRS doesn’t typically expend resources for no reason, so what exactly triggers a tax audit? There are a few things that can make the IRS notice you when you file your taxes. Some of the most common include:
1. High Income
Statistically, the IRS audits higher earners more often because there’s more at stake — larger returns, larger potential discrepancies, and sometimes, more complex investments and deductions.
For incomes under $200,000, the audit rate is about 0.2% on average. The rate jumps significantly once you pass $500,000 (1.4% to 2.9% and more). The average audit rate gets even higher if you make more than $1,000,000.
While you shouldn’t necessarily cap what you earn, it’s important to maintain meticulous records for every source of income. You also need to be careful with complex investment reporting, like stock sales or business interests.
2. Unreported Income
The IRS matches the income you report with the W-2s, 1099s, and other tax forms they receive directly from employers, clients, and financial institutions. Regardless of where your earnings come from, they are subject to tax liability and need to be reported. Even small side gigs and freelance works will require 1099s, and any discrepancies can cause serious problems. If you forget—or omit—a source of income, the IRS will notice.
This also includes investment accounts (1099-INTs or 1099-DIVs) and cryptocurrency transactions. So, always double-check bank accounts, freelance gigs, brokerage accounts, and anything else that earns you income in any given year. Report it, pay additional tax as necessary, and avoid an audit.
3. Large Deductions Compared to Income
The IRS may suspect exaggeration or fabrication if your deductions look disproportionate to your income. For example, if you report $60,000 of income but claim $40,000 in deductions, you’ll probably get a notice from the IRS. Some of the most common areas of IRS flags regarding deductions include charitable donations, 100% business use of a vehicle, mortgage interest, lots of pricey dinners with clients, and medical expenses.
Keep receipts, donation letters, and medical bills, and organize them by tax year. You should also be ready to explain how you qualify for each deduction if selected for an audit.
4. Home Office Deduction
The IRS knows that a lot of taxpayers either misunderstand or misuse the home office deduction. In fact, it’s one of the most overclaimed write-offs. In reality, your home office must be a separate space used exclusively and regularly for business. Occasional use or mixed-use spaces (like a guest bedroom that doubles as an office) usually don’t qualify.
To make sure you’re protected in case you face an audit, measure the dedicated workspace precisely and document how it’s used for business.
5. Repeated Business Losses
Businesses are expected to make a profit eventually. Otherwise, they tend to close their doors for good. Reporting losses year after year can make the IRS wonder if you’re running a business or a hobby.
If you report losses three out of five years, your business could be labeled a hobby. And unfortunately, hobby expenses aren’t deductible in the same way business expenses are. Therefore, it’s important to keep a business plan, client lists, marketing materials, and other proof that you’re trying to earn a profit. If you’re operating at a loss for several years, consult with a tax professional so you can better prepare for an audit.
6. Earned Income Tax Credit (EITC) Claims
The EITC offers generous refunds but has a history of being incorrectly claimed. To qualify, you must meet strict income limits and family status. Errors around qualifying children and income thresholds are some of the top audit triggers. If you want to claim the earned income tax credit, make sure you review eligibility carefully and double-check all information before submitting it.
7. Foreign Accounts and Assets
The IRS has international reporting agreements and aggressively enforces disclosure rules. If your foreign bank accounts exceed $10,000 at any point in the year, you must file an FBAR. You also need to make sure to disclose any and all offshore accounts and assets, even if the income or balance is minimal. Other reporting may include Form 8938 (Statement of Specified Foreign Financial Assets).
8. Cash-Based Businesses
Businesses that primarily operate in cash, like restaurants, bars, salons, and repair services, are harder to track. Cash income often goes underreported, and in some instances, the IRS may use undercover shoppers or lifestyle audits to help detect discrepancies. Business owners of cash-based establishments need to keep detailed records and should deposit all cash earnings in business bank accounts rather than pocketing them.
9. Math Errors and Typos
Simple errors can make your return look suspicious or create inconsistencies. This can include things like incorrect Social Security numbers, wrong math when adding up deductions or income, blank fields, and estimated expenses (or rounded expenses). You should ideally use tax preparation software or work with a tax preparer to ensure that you don’t have any issues or errors when you file. If you’re doing it on your own, always double-check everything before you submit it.
10. Rounded Numbers Everywhere
When expense categories all show neat, round numbers, it may suggest you’re estimating rather than using actual receipts. Perfect figures (even things like $1,000 or $500) raise suspicion, as real expenses rarely come out so neatly. Instead, report actual numbers and keep backup receipts for future verification.
What to Do If You Are Audited
If you receive an audit notice, stay calm and proactive.
- Respond promptly to all IRS communications.
- Stay organized and gather all supporting documents early.
- Be honest, don’t try to hide information.
- Get professional help.
Facing an IRS audit can sound overwhelming, but the truth is: most audits can be avoided with careful, honest tax filing. Understanding the triggers—and taking steps to avoid them—can help keep your return in good standing.
At Del Real Tax, we’re here to help you file accurately, maximize your deductions, and avoid unnecessary IRS scrutiny. If you have questions about your return or you’re facing an audit, we’re just a call or click away. Contact us today to schedule a consultation and get the expert support you deserve.
