Top 10 Reasons the IRS Will Audit You — And How to Reduce Your Risk
No one likes the idea of an IRS audit. While the chances of being audited are relatively low—less than 1% for most taxpayers—certain situations raise red flags and make the IRS more likely to take a closer look at your return.
According to recent IRS reports, audits are most common among higher-income taxpayers, self-employed individuals, and those with complex financial situations. But even everyday taxpayers can end up facing an audit if their returns trigger suspicion.
Below are the top 10 reasons the IRS might audit you, with real-world examples and strategies to lower your risk.
1. High Income Levels
The higher your income, the more likely you are to be audited. While taxpayers making under $200,000 are rarely audited, the IRS devotes more resources to taxpayers in the $200,000–$1 million range, and especially those making $1 million+.
Example: A family earning $850,000 a year with multiple rental properties and investment accounts has a higher chance of audit than a household earning $75,000.
Tip: Ensure all 1099s, W-2s, K-1s, and brokerage statements are included. Even a missing small account could trigger a flag.
2. Unreported or Underreported Income
The IRS uses a system called Information Return Matching, which automatically cross-checks what’s reported on your return with W-2s, 1099s, and other forms submitted by employers, banks, and brokers. Underreporting often will result in an issuance of a CP2000; the IRS sends you notice that your income possibly was under reported. If the IRS believes it is part of a bigger issue, they will open a full audit.
Example: You forgot to report a $600 Venmo 1099-K from selling items online. The IRS computer will catch this mismatch.
Tip: Keep a checklist of all tax forms you expect, and don’t file until you’re sure everything has arrived.
3. Excessive Business Deductions
If you’re self-employed or own a small business, reporting unusually high deductions compared to income or industry averages can draw scrutiny. Typically the IRS and their computers are set up to flag expenses that are unreasonable for your industry. Additionally, if you have large losses or show very limited income, you may draw an audit if the IRS questions how you are paying for your on-going living expenses. Similarly, if you have 3 years or more of losses, the IRS may audit your income to consider your buisness as a hobby.
Example: A freelance photographer earns $70,000 but deducts $45,000 in travel, meals, and “marketing.” The IRS will likely want proof.
Tip: Deduct only ordinary and necessary business expenses under IRS rules. Keep mileage logs, receipts, and clear documentation.
4. Claiming the Earned Income Tax Credit (EITC) Improperly
Example: Claiming a child who doesn’t actually live with you, or misreporting income to qualify for a larger credit.
Tip: Double-check residency rules and income limits before claiming the EITC. Keep school, medical, or residency records if custody is shared.
5. Large Charitable Donations
Donating to charity is good, but donations far higher than average for your income bracket raise eyebrows.
Example: A teacher earning $50,000 claims $20,000 in donations. Unless supported by proof, this may be questioned.
Tip: For donations over $250, get a written acknowledgment from the charity. For non-cash donations, keep receipts, appraisals, or valuation guides.
6. Cash-Intensive Businesses
Restaurants, bars, salons, convenience stores, and similar businesses often come under scrutiny because cash income is harder to track. The IRS will look at prior trends and also similar businesses.
Example: A restaurant reports $300,000 in annual revenue when similar restaurants in the same area average $750,000.
Tip: Deposit cash daily into a business account, maintain point-of-sale records, and keep payroll logs accurate.
7. Rental Property Losses
Rental property owners often deduct depreciation, repairs, and mortgage interest. But claiming losses year after year without showing intent to make a profit can lead to an audit.
Example: A taxpayer claims $15,000 in rental losses for five consecutive years on a vacation home that’s rarely rented.
Tip: Understand passive activity rules. To deduct losses, you must show active participation (e.g., setting rents, managing repairs).
8. Cryptocurrency Transactions
The IRS is aggressively tracking digital assets. Since 2020, tax returns ask if you had any cryptocurrency transactions. Failing to disclose is a major red flag.
Example: You buy Ethereum for $2,000 and sell it for $12,000, but never report the gain. Exchanges now issue 1099 forms, and the IRS has subpoenaed Coinbase and others for records.
Tip: Keep detailed crypto records—purchase date, cost, sales price, and fees. Report gains and losses like stock trades.
9. Self-Employment Income
Freelancers, gig workers, and contractors often underreport income or over-claim expenses, making them more likely targets. Expenses need to make sense for the work; if you are an Uber driver, the IRS will question the reason for an office space.
Example: An Uber driver reports $35,000 income but deducts $25,000 for vehicle expenses without logs. Or the Uber driver double dips with expenses and counts both milage and actual vehicle expenses.
Tip: Separate business and personal bank accounts, use accounting software, and keep receipts for mileage and expenses.
10. Math Errors or Suspicious Patterns
Even small mistakes—like transposed numbers or missing Social Security digits—can cause the IRS to take a closer look.
Example: Claiming a dependent one year, not claiming them the next, and then claiming them again. These inconsistencies often trigger checks.
Tip: Use tax software or a tax professional to reduce errors. Review all numbers before filing.
📊 Quick Reference: Common IRS Audit Triggers
| Reason | Example | IRS Concern |
|---|---|---|
| High Income | $1M+ reported | Complex tax planning, hidden income |
| Unreported Income | Missing 1099-K | IRS form-matching system |
| Business Deductions | 80% of income deducted | Inflated expenses |
| EITC Errors | Claiming non-qualifying child | Improper credit |
| Charitable Donations | $20k claimed on $50k income | Overstatement of deductions |
| Cash Business | Low reported revenue | Skimming cash |
| Rental Losses | Vacation property “losses” | Not a true rental activity |
| Cryptocurrency | Failing to report sales | IRS has exchange data |
| Self-Employment | Uber driver with no logs | False or inflated expenses |
| Math Errors | Wrong SSN or figures | Inaccuracy/patterns |
Virginia-Specific Notes
While IRS audits apply nationwide, Virginia residents may also face state-level audits from the Virginia Department of Taxation. Sometimes the state piggybacks off IRS audits, reassessing state tax liability if the IRS changes your federal return.
Tip: If you’re audited by the IRS, expect a follow-up from Virginia. Always keep both federal and state documentation aligned. If you are audited by the IRS and there is a determination, make sure you file an amendment to the Virginia return as quickly as possible. If you do not file your own new return, Virginia will access more penalties and your debt might be considered non-dischargeable in the future, if you file bankruptcy.
FAQs About Reasons for IRS Audits
Q: How long does the IRS have to audit me?
A: Usually 3 years after a return is processed, but up to 6 years if you underreport income by more than 25%, and indefinitely in cases of fraud.
Q: Can I be audited if I file electronically?
A: Yes. E-filing reduces math errors, but the IRS still audits based on income and deduction red flags. Most audits based on missing income will not happen until two to three years after the filing.
Q: Will bankruptcy stop an IRS audit?
A: Bankruptcy typically stop collection activity, but not necessarily an IRS audit. However, tax debts may be reviewed during the process.
Q: What happens if I can’t afford to pay after an audit?
A: The IRS offers payment plans, and in some cases, an Offer in Compromise may be available.
Final Thoughts
An IRS audit isn’t always catastrophic—it often just means the IRS needs clarification. Still, by reporting all income accurately, claiming only legitimate deductions, and keeping excellent records, you can significantly reduce your risk.
If you are audited, having an experienced tax professional represent you can make the process far less stressful and ensure you don’t pay more than you truly owe. Feel free to set up a free consultation with one of our tax resolution attorneys about dealing with your audit or tax debt.