IRS Audit Red Flags: What Triggers an Audit and How to Avoid Them

The IRS audits less than 1% of all individual tax returns, but certain factors substantially increase your statistical risk. Understanding what triggers additional scrutiny allows you to file accurate, defensible returns — and to have your documentation ready if you are ever selected.

How IRS Audit Selection Works

The IRS uses a Discriminant Information Function (DIF) scoring system that assigns each return a score based on how much its deductions, credits, and income deviate from statistically expected values for returns with similar income levels. Higher DIF scores indicate higher audit potential. Returns are also selected through computer matching (comparing reported income against 1099s and W-2s), random selection, and examination of related returns (if your business partner is audited, you might be too).

High-Income Returns

The audit rate rises significantly with income. Returns reporting over $1 million face audit rates of several percent compared to well under 1% for middle-income filers. If your income places you in a higher bracket, expect more scrutiny and maintain more meticulous records. Business income, particularly from Schedule C, draws additional attention at all income levels.

Common Audit Triggers

Business losses claimed every year, particularly on Schedule C: the IRS may reclassify the activity as a hobby if you show losses more than three of five years. Unreported income: the IRS receives copies of every 1099, W-2, and K-1 issued and runs matching programs. Discrepancies trigger automatic notices. Unusually high charitable deductions relative to income. Home office deductions: legitimate and defensible if the space is used regularly and exclusively for business, but frequently overclaimed. Cash-intensive businesses (restaurants, salons, contractors) where income is harder to verify independently.

If You Are Audited

Correspondence audits (the most common type, conducted by mail) ask you to document specific items. Office audits require you to visit an IRS office with your records. Field audits involve an IRS agent visiting your business or home. For any audit, do not respond without either a tax professional representing you or thorough preparation. Respond only to the specific issues raised — do not volunteer additional information. Keep all audit correspondence and respond by the deadlines provided.

Visit our resources for record-keeping guides, or contact our tax professionals if you have received an audit notice.