The IRS audits fewer than 1% of individual tax returns each year. But that statistic is misleading — because audits are not randomly distributed. Certain patterns, deductions, and discrepancies dramatically increase your chances of being selected.

Understanding what draws IRS attention is not about gaming the system. It is about filing accurately, documenting your deductions properly, and not inadvertently raising flags that invite scrutiny you do not need.

Here are the ten most common audit triggers — and what to do about each one.

1. Unreported Income

The IRS receives copies of every W-2, 1099, and K-1 issued to you. Their computers automatically match these against your return. If you received a 1099 for $15,000 in freelance income and did not report it, the IRS will know.

This is the most straightforward audit trigger — and the most avoidable. Report all income, even if you did not receive a tax form for it. Cash income, barter income, and income from informal arrangements are all taxable.

What to do: Ensure every income source is reported. If you receive a corrected or late 1099 after filing, file an amended return.

2. Large or Unusual Deductions Relative to Income

The IRS uses statistical models to identify returns where deductions are unusually large relative to income. If your charitable contributions, business expenses, or other deductions are significantly higher than the average for your income level, your return may be flagged for review.

This does not mean you should not take legitimate deductions. It means you should be prepared to document them.

What to do: Keep receipts, bank statements, and records for every deduction you claim. Large deductions are fine — undocumented large deductions are not.

3. Home Office Deduction

The home office deduction is legitimate and valuable — but it is also one of the most frequently abused deductions, which means the IRS scrutinizes it carefully.

To qualify, the space must be used regularly and exclusively for business. A desk in your bedroom where you occasionally check email does not qualify. A dedicated room used only for your business does.

What to do: Measure the square footage of your dedicated workspace and calculate the percentage of your home it represents. Keep records of your home expenses (mortgage/rent, utilities, insurance). Do not claim the deduction unless the space genuinely meets the exclusivity requirement.

4. Business Meals and Entertainment

The Tax Cuts and Jobs Act of 2017 eliminated the deduction for entertainment expenses and limited the meals deduction to 50% of qualifying expenses. Despite this, many business owners continue to deduct entertainment or claim meals without adequate documentation.

The IRS requires contemporaneous records for meals: the amount, date, location, business purpose, and the names of the people present.

What to do: Keep a log or use an expense tracking app. Note the business purpose for every meal. Do not deduct personal meals or entertainment.

5. Vehicle Use Deductions

Claiming 100% business use of a vehicle is a significant red flag — particularly for a vehicle that is also your personal car. The IRS knows that most people use their vehicles for both personal and business purposes.

What to do: Keep a mileage log that records the date, destination, business purpose, and miles for every business trip. The standard mileage rate method (67 cents per mile in 2024) is simpler to document than the actual expense method. Be accurate about your business use percentage.

6. Cash-Intensive Businesses

Businesses that deal primarily in cash — restaurants, bars, hair salons, car washes, retail — receive heightened IRS scrutiny because cash income is harder to verify and easier to underreport.

If you operate a cash-intensive business, the IRS may compare your reported income to industry norms, your lifestyle, and your bank deposits.

What to do: Deposit all cash receipts promptly and maintain detailed records. Ensure your reported income is consistent with your bank deposits and lifestyle. Work with a CPA who understands the documentation requirements for cash businesses.

7. Claiming Losses Year After Year

The IRS distinguishes between a business (which can deduct losses) and a hobby (which cannot). If your "business" consistently generates losses year after year, the IRS may conclude it is actually a hobby and disallow the deductions.

The IRS presumes an activity is a business if it shows a profit in at least 3 of the last 5 years (2 of 7 for horse breeding). If you do not meet this threshold, you need to demonstrate a genuine profit motive.

What to do: If you have a legitimate business that is in a startup phase or experiencing temporary losses, document your business activities, your efforts to generate profit, and your business plan. Consult a CPA before claiming significant losses from an activity that could be characterized as a hobby.

8. Rental Property Losses

Rental property losses are subject to passive activity rules that limit how much you can deduct against ordinary income. Most taxpayers can only deduct up to $25,000 in rental losses per year (and this phases out between $100,000 and $150,000 of adjusted gross income).

Real estate professionals who spend more than 750 hours per year in real estate activities can deduct rental losses without limitation — but the IRS scrutinizes this claim carefully.

What to do: Keep detailed records of your rental income and expenses. If you are claiming real estate professional status, document your hours carefully. Ensure your rental losses are within the allowable limits for your income level.

9. Cryptocurrency Transactions

The IRS has made cryptocurrency compliance a priority. Every sale, exchange, or use of cryptocurrency to purchase goods or services is a taxable event. Many taxpayers either do not know this or choose to ignore it.

The IRS now asks directly on Form 1040 whether you received, sold, or exchanged cryptocurrency during the year. Answering "no" when you did is a false statement on a federal tax return.

What to do: Track every cryptocurrency transaction — purchase price, sale price, date, and amount. Use cryptocurrency tax software or work with a CPA who understands digital asset taxation.

10. Amended Returns

Filing an amended return (Form 1040-X) is not itself an audit trigger — but amended returns that claim large refunds do receive additional scrutiny. The IRS wants to ensure the amendment is legitimate.

What to do: File amended returns when you have a genuine error to correct. Keep documentation supporting every change you make.

What Happens If You Are Audited?

Being selected for an audit does not mean you did anything wrong. Most audits are resolved through correspondence — you provide documentation, the IRS reviews it, and the matter is closed.

If you receive an audit notice:

1. Do not ignore it — there are deadlines
2. Read it carefully to understand exactly what is being examined
3. Gather documentation for the items in question
4. Consider retaining a CPA or Enrolled Agent to represent you

Our firm has extensive experience with IRS audits and representation. If you have received an audit notice or want to review your return for potential red flags before filing, we are happy to help.

Frequently Asked Questions

Does the IRS audit randomly? A small percentage of returns are selected randomly as part of the IRS's National Research Program. But the vast majority of audits are triggered by specific issues identified through the IRS's automated screening systems.

How far back can the IRS audit? Generally, the IRS has three years from the filing date to audit a return. If you underreported income by more than 25%, the statute extends to six years. There is no statute of limitations for fraudulent returns or unfiled returns.

What is the best way to avoid an audit? File accurately, report all income, document your deductions, and work with a qualified tax professional. There is no guarantee against being selected, but accurate returns with solid documentation resolve quickly even when they are examined.