Each year, the IRS sends out thousands of notices to taxpayers informing them they’ve been selected for audit. Understanding the factors that raise red flags can help you reduce the likelihood of facing one.
Let’s start with the bottom line: If your tax return is accurate, well-documented, and clearly explains all positions taken, the risk of being audited significantly decreases. Taking the time to ensure your income, deductions, credits, and supporting documents are correct can help you avoid unnecessary scrutiny—and the costly and stressful process of an audit.
Below are some IRS audit red flags that commonly attract attention:
1. Typos happen—but even a small error can trigger an audit. Double-check all identifying information.
2. Incomplete or Inconsistent Information
Make sure the data on your federal and state tax returns align. The IRS and state agencies share information, and mismatches can lead to audits from both.
3. Math Errors
Basic miscalculations—especially on deductions or credits—can delay processing or route your return for manual review. If your return involves complex numbers, have a CPA review it.
4. Amended Returns
Filing an amended return, particularly one that significantly reduces your tax liability, is more likely to be reviewed closely.
5. Rounded or Repetitive Numbers
Expenses that consistently end in “00” or repeated figures may suggest estimates instead of actual records, which can lead to scrutiny.
6. Multiple Returns With Similar Numbers
Repeating the same expense figures across years (or categories) may signal guessing. If you must estimate, avoid round numbers and document your methodology.
7. Prior Audit History
Although being audited once doesn’t guarantee another, prior changes resulting from an audit may increase the likelihood of future scrutiny. Always stay meticulous moving forward.
8. Use of an Aggressive or Dishonest Tax Preparer
The IRS actively investigates preparers suspected of fraud. If your preparer falsifies data or is under investigation, your return could be swept into a broader inquiry.
9. Large or Unexplained Income Changes
Significant income swings—especially without clear supporting events like job loss or inheritance—can appear suspicious and merit review.
10. Large Refunds or Net Operating Losses (NOLs)
Substantial refunds, especially those not tied to W-2 over-withholding, or carried-over NOLs, often get flagged due to their complexity and potential for error.
11. Foreign Bank Accounts
The IRS has limited visibility into foreign institutions. Failing to disclose foreign accounts is a serious violation and increases audit risk.
12. Income from a Foreign Trust
Income or distributions from foreign trusts, if not properly reported, may lead to audits or even criminal charges.
13. Cross-Border Transactions
Frequent international transfers or asset holdings abroad are often subject to additional scrutiny due to the IRS’s concerns about tax evasion.
14. Use of Tax Shelters
Participating in a known tax shelter is an immediate red flag and often triggers deeper examination.
15. High-Volume Cash Transactions
The IRS views large cash activity as high-risk. Businesses and individuals heavily reliant on cash—such as restaurants or salons—are more likely to face audits.
16. Inflated Charitable Contributions
Donations should be properly documented and reasonable relative to income. Non-cash contributions especially draw attention and require detailed substantiation.
17. Excessive Unreimbursed Employee Expenses
Unusually high expenses in this category are often misclassified or exaggerated. The IRS benchmarks these against industry norms and often challenges them.
