What Triggers an IRS Audit

An IRS audit can feel intimidating, but most audits are not random. In many cases, returns are selected because something in the filing raises a red flag or falls outside normal patterns. Understanding what commonly triggers an audit can help business owners and professionals reduce risk and stay prepared.

Below are some of the most common factors that may increase the likelihood of an IRS audit.

1. Reporting Income That Doesn’t Match IRS Records

The IRS receives income information directly from employers, banks, and clients through forms such as W-2s and 1099s. When reported income on a tax return does not align with what the IRS has on file, it often triggers a notice or further review.

Failing to report side income, contract work, or investment earnings is one of the most common reasons returns are flagged.

2. Large or Unusual Deductions

Deductions that are significantly higher than the average for similar taxpayers can attract attention. This includes unusually high charitable contributions, business expenses, or home office deductions without proper documentation.

While deductions are legitimate when supported, claiming amounts that appear excessive or inconsistent with income levels may increase audit risk.

3. Consistent Business Losses

Reporting business losses year after year can raise questions about whether the activity is truly a business or a hobby. The IRS looks for signs of profit motive, especially when losses offset other income.

If a business reports losses multiple years in a row without clear justification, it may be reviewed more closely.

4. Cash-Heavy Businesses

Businesses that handle a large volume of cash tend to receive additional scrutiny. Restaurants, medical practices offering cash payments, and service-based businesses may face a higher risk if income reporting appears inconsistent.

Accurate recordkeeping is especially important for cash-based operations.

5. High Income Levels

Higher income does not automatically mean an audit, but statistically, higher-income taxpayers are audited more frequently. Complex financial structures, investments, and multiple income streams increase the likelihood of review.

This makes accurate reporting and proactive planning critical.

6. Mathematical Errors or Incomplete Information

Simple mistakes such as math errors, missing schedules, or incomplete forms can lead to IRS follow-ups. While these may not always result in full audits, they can trigger correspondence audits or requests for clarification.

Careful preparation helps avoid unnecessary attention.

7. Aggressive Tax Positions

Using tax strategies that push the limits without proper support or documentation can increase risk. This includes misclassifying employees, overstating deductions, or improperly structuring entities.

Proactive planning and compliance help reduce exposure.

How to Reduce Audit Risk

While no strategy eliminates audit risk entirely, consistent, accurate reporting significantly lowers the chance of issues. Maintaining clean records, filing on time, and working with a qualified CPA helps ensure filings are complete, compliant, and defensible.

If an audit does occur, having organized documentation and professional guidance can make the process far more manageable.

Final Thoughts

Most audits are triggered by inconsistencies—not by chance. Understanding common audit triggers allows business owners and professionals to file with greater confidence and avoid unnecessary stress.

Staying proactive, accurate, and compliant is the best defense.