5 Red Flags That May Trigger an IRS Audit

You know the deal: unless you’re making some serious cash, it’s highly unlikely that the IRS will audit you. Recent IRS data shows the agency audited only around 0.4% of individual returns for the 2014 through 2022 tax years.

That is, unless you end up with a suspicious-looking tax return. But how do you know if your tax return looks suspicious?

Well, if you’re trying to game the system, which, by the way, is a huge no-no, then chances are your tax return will have some red flags that spur the IRS to investigate.

If you’re not, however, there are certain things you can do that will still trigger an audit. These are five of the biggest tax filing mistakes to avoid, so you don’t have to spend hours of your life searching for receipts while the IRS combs through your finances.

Rounding numbers

This may be obvious to you, but when you do your taxes, accuracy is paramount. If you made $57,320 last year, don’t say you made $57,000 (or $58,000, either). Rounding to the nearest dollar is acceptable, but that’s about it.

Put in the exact amounts for everything you can, from income, to how much you paid for childcare, to your mortgage interest. Estimates will work for certain things, for example, the utilities you paid for that apply to your home office, but in general, it’s much safer to put accuracy above all else.

A string of neatly rounded numbers (say, $400 in tips, $850 in student loan interest, $100 in medical expenses) can flag your return in the IRS computer system. The agency already has the exact amounts from the institutions that reported them.

Mathematical mess-ups

If you’re doing your taxes yourself, make sure you check, double-check, and triple-check your math.

Writing a number down wrong or carrying a 2 when you meant to carry a 4 could jeopardize the accuracy of your entire return, making you more susceptible to owing additional taxes, and triggering an audit. That’s one reason that using a service like E-file, which does all your math for you, is a good idea.

If the IRS catches a math error, the agency will typically fix it and send you a notice explaining any adjustment. You have 60 days to object if you disagree, and the error can delay your refund.

You’re claiming questionable business expenses or self-employment expenses

Claiming a dinner during which you wooed a huge client to sign with your business is perfectly legitimate. Claiming the bespoke suit you bought to impress that client is not.

Business and self-employment expenses are places where people are often tempted to inflate their claims, even if only by a little bit.

Remember, however, that the IRS goes over thousands and thousands of business deductions every year. They have a good idea of what’s typical and what’s not. If you’re making $45,000 and claiming $15,000 in business expenses, that’s a pretty big red flag.

The IRS also uses occupational codes to gauge typical expenses by profession. A return showing 20% or more above the norm may get a second look. Home office deductions get similar scrutiny, regular employees working from home generally cannot deduct home office expenses, even if they pay out of pocket. That deduction is reserved for self-employed people who meet specific requirements.

You forgot to report income

Plenty of taxpayers have a side hustle, LLC, or sole proprietorship they use to bring in additional income. As great as these income boosters are, they can make tax season a bit more complicated.

While your employer sends you that handy W-2 with all your income and withholding neatly reported, keeping track of every dollar you made throughout the year requires a bit more effort.

It’s absolutely necessary that you do so though, otherwise, your records won’t match up with the records of the business that paid you (yes, the IRS does check them against each other).

Forgetting to report income can not only mean you owe more taxes than you thought you did. It can also make the IRS think you’re trying to hide income, which can mean you’re next in line for an audit.

Old brokerage accounts, forgotten 1099s, and distributions from a college savings account used for tuition are among the most commonly overlooked. If the IRS spots something missing, it will typically conduct at least a correspondence audit by mail or over the phone.

You didn’t report cryptocurrency or digital asset transactions

Cryptocurrency and digital assets are one of the IRS’s most active enforcement areas. The agency’s own data suggests the noncompliance rate for reporting income from digital assets like cryptocurrencies and non-fungible tokens could be as high as 75%, and the IRS has been steadily expanding its compliance efforts.

Form 1040 now prominently features a question asking whether you received, sold, exchanged, or otherwise disposed of a digital asset during the tax year. Brokers also generally must report digital asset proceeds on Form 1099-DA, giving the agency another way to flag returns that don’t match.

If you traded, sold, or received crypto during the year, report it. Even small transactions can create a mismatch that draws IRS attention.

What to do if the IRS says your return has an error

Sometimes the IRS will send a notice or return your form because of a missing signature, misreported income, a math error, or a rejected e-file. If your e-filed return was rejected, the system will provide an error code so you can correct the issue and try again. If the IRS sent you a notice, respond quickly; delays can lead to additional tax, penalties and interest, or a smaller refund than expected. More information about correcting an incorrect return is available on the Taxpayer Advocate Service website – here.

Nobody wants to be audited. Avoid it by using E-file to file your taxes fast, easily, and accurately.

Note: Tax laws may change with little notice. We do our best to keep this information current, but it is provided on an “AS IS” basis. It should not be considered, legal, financial, or other professional guidance. For more, see our terms.