These 10 Red Flags Could Lead to an IRS Audit

Errors on your return or excessive tax deductions are some of the things that could trigger an IRS tax audit.

Updated May 13, 2024
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The Internal Revenue Service (IRS) audited close to 630,000 tax returns in the fiscal year 2021. This was about 0.38% of the total returns filed. While this is a small number of audits, being audited is no small matter for tax filers subject to an IRS examination.

If the prospect of being audited fills you with dread, it’s helpful to know some of the most common audit triggers.

This list of 10 red flags will hopefully help you reduce the chances of an audit — or at least be more prepared if an IRS examiner calls.

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10 reasons you may get audited

According to the IRS, auditing usually occurs because of computer screening, random selection, or because they’re conducting a related examination, such as reviewing the returns of your business partners.

Here are some of the most common reasons you may end up being audited:

1. Making errors on your tax return

Sometimes, a simple math error is enough to trigger an audit. If the information you submit to the IRS doesn’t add up, IRS computer screening will likely catch the error automatically.

This can lead to a simple audit where you’re asked about the discrepancy by mail and can correct it. Or, it may prompt the IRS to take a closer look at your entire return with a more in-depth audit.

To avoid this mistake, always double-check your math — or use one of the best tax software programs that will catch at least someerrorss for you.

2. Taking too many deductions

Falsely padding deductions is one of the common tax scams. The IRS warns taxpayers against inflating their deductions to reduce taxes owed.

The IRS establishes “norms” based on sample returns. If you take so many deductions, you fall outside of the nor, and thiss is a major red flag that can come to the attention of the IRS via a computer screening.

Of course, if deductions are legitimate and you can back them up with documentation, you should claim them. But just be aware that if your deductions are very high compared to your reported income level, the IRS will likely want to know why.

3. Being self-employed

When you have an employer, it’s pretty hard to cheat on your tax filing because your employer reports your income, and you likely have limited deductions for business purposes.

If you’re self-employed, you may have income from several different sources — including cash income. And you have plenty of chances to deduct expenses made for business use, not all of which the IRS will necessarily view as legitimate.

Since it’s easier to hide money that isn’t reported on a W-2 form or to reduce your income with fake business expenses, the IRS is more likely to ask questions of sole proprietorships and small business owners.

The IRS may also want to confirm you’ve paid taxes as you earned income, so make sure you submit quarterly estimated tax payments to avoid late payment penalties if you have non-wage income.

You can’t do much to reduce the added risk of self-employment. But you should be careful to keep proper documentation, particularly if you own a cash business, so you can show that you claimed all your income and took only legitimate deductions in case an IRS agent comes calling.

4. Depositing (or spending) a lot of cash

You’re supposed to report all the income you receive from all our sources. When you deposit or spend a lot of money, the IRS wants to know where the money came from — especially if it’s not clear on your tax returns.

Since your bank is required to report deposits over $10,000 to the government, depositing a large sum at once is especially likely to trigger an inquiry from the IRS. They’ll likely wonder where these funds came from and whether they were declared.

If you make large deposits or spend big sums, be sure to document where the cash came from — and declare all of it so you can pay the taxes you owe on it.

5. Claiming the earned income tax credit

The earned income tax credit is a section of the tax law that is supposed to help working families with limited incomes by giving them back a refund of some of the taxes they paid during the year. The EITC, as it’s called, is a costly anti-poverty program for the government, with a price tag in the billions.

Unfortunately, the requirements to qualify for this credit are very stringent, and the IRS is likely going to want to make very sure that you’re entitled to it if you claim it. EITC recipients are actually more likely to be audited now than people with high income, according to a ProPublica report. There are many reasons for this, including the fact that Congress has pressured the IRS to prevent credit overpayments.

You can’t do much about the increased audit risk, and you should definitely claim the credit if you’re entitled to it. But be prepared for your refund to be held up for additional examination, and be sure you follow IRS guidelines. Don’t claim the EITC if you aren’t actually eligible for it.

6. Misreporting your earnings on your tax return

You aren’t the only one who reports information on your earnings — your employer does too. If the taxable income you report doesn’t match what your employer says you earned, it’s easy for the IRS to catch the discrepancy. And the IRS is likely to want to know why the numbers don’t add up.

Double-check your earnings with your W-2 to avoid this mistake — and be sure to report any earnings you have from outside of your job, such as money from a side gig. Unreported income or underreported income could increase your audit risk — and potentially result in a hefty tax bill.

7. Making large donations to charity

Generosity is a good thing, and you are rewarded on your taxes for it since you can deduct charitable contributions if you itemize on your tax returns.

But you are limited in the amount you can deduct for charitable donations. According to the IRS, you may deduct up to 50% of your adjusted gross income, though certain limitations apply. If you donate a percentage of your income that seems unreasonably large, the IRS is probably going to want to take a close look at whether you really made the donations you’ve claimed.

The IRS may be even more suspicious if you claim a large charitable deduction for non-cash donations, such as donating old furniture or clothing to Goodwill.

Be sure you have documentation of all donations you make and avoid inflating the value of the property you donate to make sure you don’t get into trouble with the IRS.

8. Claiming the wrong filing status

When you file your taxes, you have the option to claim a standard deduction instead of itemizing. The standard deduction is a set amount, which is based on your filing status. Singles have a smaller standard deduction than heads of household, qualifying widows, or married couples filing joint returns.

You have to choose the correct filing status so your standard deduction can be accurately calculated. Your filing status can also determine your tax bracket as well as whether you make too much money to be eligible for certain deductions.

It’s important you actually qualify for the filing status you claim. If you choose a filing status you don’t meet the requirements for, the IRS is likely to notice, ask questions, and require correction.

9. Dipping into your retirement fund

When you take money out of your retirement fund, you could be subject to a penalty if you aren’t at least 59 1/2 or you don’t qualify for a hardship exemption or special withdrawal.

And regardless of your age, you’re generally taxed at your ordinary income tax rate on any distributions you take out of most retirement accounts.

Because many Americans don’t properly report withdrawals from their retirement accounts, your return is more likely to catch the eye of the IRS when you’ve dipped into tax-advantaged retirement accounts.

10. Investing in cryptocurrency

More and more Americans are turning to cryptocurrency as an investment. In fact, a study last year found that 16% of Americans said they were invested in or traded cryptocurrency, a far cry from 1% of Americans who said they were invested in 2015.

But with more people holding cryptocurrency, it may be confusing to figure out regulations and tax laws when it comes to crypto investments. Consider taking some time to account for any income or interest you may have received, and don’t forget any non-fungible tokens, or NFTs, that you may have invested in.

FAQs about IRS audits

What can trigger an IRS audit?

Some IRS audit red flags include:

  • Reporting lots of losses on a Schedule C IRS form 
  • Claiming many business meals, entertainment expenses, and home office deductions
  • Not reporting all your income
  • Not reporting assets in foreign bank accounts

Excessive write-offs mismatching income information may trigger IRS scrutiny. Make sure to contact a tax expert or tax attorney if you aren't sure how to file your taxes.

Does the IRS tell you if you’re being audited?

If you are selected for an audit, the IRS will notify you by mail. You may be asked to provide additional information about your income, expenses, and deductions by mail, or you may be asked to answer questions at an in-person interview. These Audit Techniques Guides can give you an idea of what to expect in your industry.

How common are IRS audits?

In the 2021 tax year, the IRS audited about 0.38% of all income tax returns, which means about 4 out of 1,000 taxpayers were required to submit additional information. The typical audit rate is very low, and the IRS generally conducts audits by mail or in-person interview at an IRS office or your home.

Does the IRS look at every tax return?

The IRS screens individual tax returns by computer for errors. You may be selected for an audit if you veer from the norms for similar tax returns. If your return is flagged, an auditor will review it for discrepancies. If they find something questionable, you may be asked to submit supporting documentation.

The bottom line on tax audits

Being audited may seem scary, but the reality is that many audits are conducted solely by mail, and audits can sometimes result in a larger refund. If you follow the rules, pay your taxes on time, and keep careful documentation of your income and deductions, an audit hopefully won’t be a problem for you. Learning more about how to manage your money can help you with proper accounting as well. And if you need additional assistance with your taxes, consider contacting a certified public accountant (CPA) or a tax professional for help next tax season.

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Author Details

Christy Rakoczy

Christy Rakoczy has a Juris Doctorate from UCLA Law School with a focus in Business Law, and a Certificate in Business Marketing with an English Degree from The University of Rochester. As a full-time personal finance writer, she writes about all things money-related but her special areas of focus are credit cards, personal loans, student loans, mortgages, smart debt payoff strategies, and retirement and Social Security. Her work has been featured by USA Today, MSN Money, CNN Money and more, and you can learn more at her LinkedIn profile.