November 25, 2024
Last Updated : March 6, 2025

What Triggers an IRS Audit and How to Avoid It

Thomas Castelli, CPA, CFP®, Partner at Hall CPA

Navigating the world of taxes is tricky enough without the looming fear of an IRS audit. While audits are relatively rare, they can be time-consuming, stressful, and, let’s face it, financially draining. The good news? Knowing what triggers an IRS audit and how to avoid one can help you stay in the clear.

Let’s break it all down—what raises red flags with the IRS and, more importantly, how you can steer clear of unwanted scrutiny.

What Triggers an IRS Audit?

The IRS uses a combination of algorithms and manual reviews to flag returns that deviate from typical filing patterns. Here are some common triggers to watch out for:

1. High Income

While audit rates have dropped across all income levels, taxpayers earning $500,000 or more are still audited at a higher-than-average rate. High-income earners are under closer watch because larger returns often involve complex deductions, investments, and other details that may raise questions.

2. Excessive Deductions

Claiming deductions significantly higher than what’s typical for your income level can attract IRS attention. For instance, if you report itemized deductions far above the average for your income bracket, the IRS may investigate. It’s fine to claim legitimate deductions—just make sure you have proper documentation.

In addition, excessive business deductions that aren’t “ordinary and necessary” for your business or industry could trigger an audit. Lavish vehicles, meals, travel, and similar expenses are ripe for abuse – and the IRS knows it.

3. Unreported or Undisclosed Income

Unreported income is a big no-no. If you earn money from side gigs, freelance work, or investments and fail to report it, you’re waving a big red flag. The IRS gets copies of your W-2s, 1099s, and other income forms, so discrepancies stand out like a sore thumb.

4. Schedule C Filers

Self-employed taxpayers who file Schedule C face heightened scrutiny, especially if they report consistent losses or operate in cash-heavy industries. Underreporting income or overstating expenses are common triggers, so maintain thorough records to back up your claims.

5. Claiming a Loss on a Hobby

If you’re reporting losses on an activity the IRS deems a hobby rather than a business, you could be flagged for an audit. To qualify as a business, the activity must have a reasonable expectation of profitability. A good rule of thumb: report a profit at least three out of every five years, and keep records showing that your hobby is run like a legitimate business.

6. Deducting Business Meals, Travel, and Entertainment

This deduction has been historically abused, making it a hot spot for audits—lavish dinners at high-end restaurants or personal travel expenses disguised as business trips are a no-no.
To claim it, you’ll need detailed records—not just receipts, but also notes on the business purpose and who attended the meal or event. Remember, expenses reimbursed by an employer aren’t deductible.

7. Claiming 100% Business Use of a Vehicle

The IRS is skeptical of claims that a vehicle is used 100% for business purposes—especially if no other personal vehicle is registered in your name. If you’re claiming a high percentage of business use, detailed mileage logs and records are crucial.

Additionally, deducting lavish vehicles that are not “ordinary or necessary” for your business or industry can trigger an audit—you don’t need a Lamborgini Urus to visit your C-class rental property on the other side of town.

8. Real Estate-Specific Audit Red Flags

The real estate professional status (REPS) is one of the most litigated parts of the tax code because it is ripe with abuse. If you have a full-time W-2 job and claim REPS, you might land yourself in an audit.

The Short-Term Rental (STR) Loophole is a legitimate strategy (we have successfully defended audits). Still, it can also trigger an audit due to abuse and IRS misunderstanding of this strategy and REPS

9. Significant Changes Year-Over-Year

A sudden drop in income or spike in deductions compared to previous years can lead to questions. Consistency is key when it comes to tax filings.

10. Earned Income Tax Credit (EITC)

The IRS estimates that one-third of EITC claims are paid in error. As a result, these claims receive extra scrutiny. If you’re claiming the EITC, ensure you fully understand the eligibility requirements and can provide supporting documentation if asked.

While other things may trigger an audit, being aware of these common audit risks can help minimize mistakes.

How to Avoid an IRS Audit

Staying on the IRS’s good side isn’t rocket science. With a little attention to detail and proper planning, you can significantly reduce your audit risk. Here’s how:

1. Report Income Accurately and Honestly

Honesty truly is the best policy. Always report all sources of income, no matter how small or irregular. Use W-2s, 1099s, and other official documents to ensure accuracy.

2. Maintain Proper Documentation

Every deduction you claim should have documentation to back it up. Save receipts, invoices, and bank statements for at least three years in case the IRS comes knocking.

Examples of Must-Keep Documents:

Donation receipts from charities.
Mileage logs for business use of a vehicle.
Invoices and receipts for business expenses.

3. Stay Consistent with Tax Filings

If your income or deductions vary wildly year-over-year, make sure you can explain why. For example, if your income dropped because you took time off work or switched industries, be prepared to show proof.

4. Use Tax Professionals for Complex Situations

When you have a complicated financial situation—like owning multiple businesses or earning income from investments—it’s best to consult a tax professional. A CPA or tax advisor can help you file correctly and avoid mistakes that might trigger an audit.

5. E-file Instead of Paper Filing & Minimize Amended Returns

Electronic filing reduces the chances of errors compared to paper returns. The IRS also processes e-filed returns faster, which can reduce audit risk. Amended returns are often manually reviewed, and this additional scrutiny could trigger an audit.

Preparing for an Audit

Facing an IRS audit can feel overwhelming, but with proper IRS audit preparation, it becomes a manageable process. Understanding the different types of audits—correspondence, office, and field—along with their timelines and expectations, is crucial.

Taxpayers should respond promptly, consult a trusted CPA, gather necessary documentation, and review their tax filings for discrepancies.

Knowing what the IRS is scrutinizing and understanding taxpayer rights can also help ease the process.

If you get audited, it’s crucial to stay professional, provide only requested information, and keep thorough records. With organized preparation and professional support, taxpayers can navigate audits effectively and achieve a favorable outcome.

Audit Appeal Process

If you disagree with an IRS audit decision, you have the right to appeal through the IRS audit appeal process.

This involves filing a written protest outlining your dispute, providing supporting evidence, and requesting a hearing with the IRS Office of Appeals.

If unresolved, options like mediation or taking the case to U.S. Tax Court are available.

Appeals can address miscalculations, disallowed deductions, income disputes, or excessive penalties.

Deadlines are crucial, with protests typically required within 30 days of receiving the audit findings.

While informal appeals may resolve minor disputes, complex cases often require formal appeals and professional representation.

A CPA can help craft a strong protest, represent you in hearings, and negotiate better outcomes. Understanding your appeal rights ensures a fair resolution and prevents unnecessary financial burdens.

Audit Resolution Options

If an IRS audit results in taxes or penalties owed, there are several audit resolution options to resolve the issue.

Payment Plans (Installment Agreements) allow taxpayers to pay their debt over time in manageable monthly payments, preventing aggressive collection actions.

Offer in Compromise (OIC) provides an opportunity to settle for less than the full amount owed if paying in full would cause extreme financial hardship, though eligibility is limited.

Penalty Abatement can reduce or eliminate penalties for late payments or filing errors, especially for taxpayers with a history of compliance or valid reasons like illness or natural disasters.

Each option has specific requirements, and working with a tax professional can increase the chances of approval and favorable resolution.

Tax Resolution Options

Tax resolution is the process of addressing tax issues such as unpaid taxes, IRS audits, penalties, and liens by negotiating with the IRS or state tax authorities to find a workable solution.

Hiring a professional for tax resolution can save time, reduce stress, and help avoid costly mistakes.

Experts like CPAs, enrolled agents, and tax attorneys have in-depth knowledge of tax laws and can provide customized solutions for issues like unpaid taxes, IRS audits, liens, or wage garnishments. If you’re dealing with mounting tax debt, receiving IRS notices, or facing enforcement actions, seeking professional help ensures a strategic approach to resolving your tax problems efficiently.

If you’re looking for professional assistance with IRS audits and tax resolution, explore our comprehensive Tax Resolution Services.

Tax Planning Matters

Filing your taxes isn’t just about avoiding audits; it’s about maximizing your refunds and staying compliant with the law. By planning ahead and keeping detailed records, you’ll not only reduce your chances of being audited but also minimize your stress and maximize your chances of winning in the event of an audit.

If you’re concerned about audit risks, contact a specialized CPA, like Hall CPA, for expert advice and personalized audit risk assessments.

FAQs on IRS Audits

1. How common are IRS audits?

IRS audits are relatively rare. For most taxpayers, the odds are less than 1%. However, the chances increase with higher incomes or complex tax filings.

2. What happens during an IRS audit?

The IRS will request additional documentation to verify the information on your tax return. This may include receipts, bank statements, or even an in-person interview.

3. Can I avoid an audit completely?

While there’s no way to guarantee you’ll never be audited, following best practices—like accurate reporting and proper documentation—can significantly reduce your chances.

4. Should I worry about small errors?

Minor math errors typically won’t trigger an audit, but they may result in a correction notice or adjustment to your return.

5. What should I do if I’m audited?

If you find yourself in an audit, it’s crucial to contact a qualified tax professional immediately. While it can be tempting to go it alone, knowing what information to provide, and not provide to the IRS can make or break your chances of successfully defending an audit.