What Triggers an IRS Audit? 15 Red Flags You Need to Know

Nobody wants to open the mailbox and see a letter from the IRS saying they're being audited. Your stomach drops. You start replaying your tax return in your head.

Here’s the reality: most people will never be audited. In recent years, the IRS has audited less than 1% of individual returns. Still, certain details raise your odds fast. If you understand what triggers an IRS audit , you can avoid the most common pitfalls before you file.

Whether you’re an employee, run a small business, or your finances are more complex, understanding audit triggers helps you file accurately and reduce risk.

1. Failing to Report All Your Income

This is the most common audit trigger because the IRS already has the receipts.

Every W-2, 1099-NEC, 1099-MISC, and 1099-K you receive is also sent to the IRS.

• Forgetting a 1099 from a side gig
• Not reporting cash income
• Missing investment income
• Failing to report cryptocurrency transactions

If a form is incorrect, request a correction. Leaving income off your return is one of the fastest ways to receive an IRS notice.

2. Earning a High Income

Like it or not, higher income increases audit odds . It’s not personal — it’s math.

High-income returns are more likely to produce meaningful adjustments, which makes them attractive audit targets.

3. Not Filing Your Tax Return

The IRS actively targets high-income non-filers . Not filing is far worse than filing and owing.

If you have unfiled tax returns , the IRS can file a substitute return for you without deductions.

4. Claiming Unusually High Deductions

The IRS uses a data scoring system called the Discriminant Index Function (DIF) to identify returns that fall outside normal patterns.

5. Claiming Refundable Tax Credits

Refundable credits such as the Earned Income Tax Credit and American Opportunity Tax Credit receive heightened IRS scrutiny.

6. Making Excessive Charitable Contributions

Charitable contributions are legitimate, but they are also one of the most audited deductions.

The IRS compares your donations to statistical norms for your income level. Contributions that appear unusually large often trigger audits.

• Donations disproportionately high compared to income
• Non-cash donations without proper valuation
• Missing Form 8283 for property donations
• Lack of written acknowledgments for donations over $250

7. Running a Business on Schedule C

Filing Schedule C is one of the most audit-prone areas of an individual tax return.

• Cash-based businesses
• Repeated losses year after year
• Large vehicle or home office deductions
• Claiming 100% business use of assets

Following IRS recordkeeping requirements and separating business and personal finances helps reduce audit risk.

8. Deducting Hobby Losses Year After Year

The IRS applies hobby loss rules to determine whether an activity is truly operated for profit.

If your activity shows losses year after year, the IRS looks at factors like recordkeeping, time invested, expertise, and profit motive.

Many hobby loss disputes end up in U.S. Tax Court , where taxpayers often lose due to poor documentation.

9. Not Reporting Professional Income as Self-Employment

Some professionals try to avoid self-employment tax by misclassifying income as passive.

• Lawyers
• Doctors
• Consultants
• Accountants
• Architects

If you materially participate in the business, income is generally subject to self-employment tax.

10. Claiming Large Rental Real Estate Losses

The IRS closely scrutinizes rental real estate losses due to frequent misapplication of passive activity rules.

• $25,000 active participation allowance (income-limited)
• Real estate professional status
• Documentation of hours and participation

11. Taking Early Withdrawals from Retirement Accounts

The IRS carefully reviews early retirement distributions , especially when penalty exceptions are claimed.

• Withdrawals before age 59½
• Improperly claimed exceptions
• Unreported distributions

12. Gambling Income and Losses

All gambling winnings are taxable income, even if you don’t receive a form. The IRS often detects unreported winnings through Form W-2G .

• Failing to report winnings
• Claiming losses without reporting income
• Incorrectly claiming professional gambler status

Losses are deductible only up to winnings and only if you itemize. Keep detailed gambling logs to support your claims.

13. Claiming the Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion can significantly reduce taxes, but it is frequently claimed incorrectly.

• Bona fide residence abroad for a full year
• Physical presence outside the U.S. for 330 full days
• Maintaining a tax home overseas

Maintaining a U.S. abode or failing day-count requirements can disqualify the exclusion.

14. Virtual Currency and Digital Asset Transactions

The IRS has significantly increased enforcement around digital assets , including cryptocurrency.

• Selling crypto for cash
• Trading one coin for another
• Using crypto to purchase goods or services
• Receiving crypto as payment

Taxpayers facing cryptocurrency tax audits often lack adequate transaction records.

15. Failing to Report Foreign Bank Accounts

Foreign financial accounts are subject to strict reporting rules under FBAR (FinCEN Form 114) .

• Required if foreign accounts exceed $10,000 at any time
• Severe penalties for noncompliance
• Applies even if income is reported

Some taxpayers must also file Form 8938 with their tax return.

The Bottom Line: What Really Triggers an IRS Audit

Understanding what triggers an IRS audit isn’t about avoiding taxes — it’s about filing accurately, keeping documentation, and knowing which areas deserve extra care.

• Report all income (the IRS already has the forms)
• Keep documentation for every deduction
• Only claim credits and exclusions you qualify for
• Respond promptly to IRS notices

Most audits occur by mail. If you receive a notice, don’t panic — gather your records and consider professional representation.