Avoid Tax Trouble: 18 Common Audit Triggers That Could Land You on the IRS Watchlist
Nobody wants a letter from the IRS. Even if your taxes are spotless, there’s always that nagging thought, did you miss something? Did a simple mistake put you on the IRS radar?
The Comprehensive Taxpayer Attitude Survey (CTAS) 2024 found that 6 in 10 taxpayers stay honest on their returns because they fear an audit. Makes sense. Even though only 0.2% of individual tax returns for 2020 were audited. That’s just 1 in 500 returns.
So why does it feel like the IRS is watching? Because they are, just not in the way most people think. Certain actions, income levels, and deductions send up red flags. Some taxpayers are far more likely to face an audit than others.
That’s what we’re breaking down today: who is most at risk and the specific moves that put you on the IRS radar.
If you find this helpful, let us know. If you are a CPA and we missed any, let us know.
Table of Contents
Who Are the Most at Risk?
Not all tax returns are created equal. Some practically beg for a second look. The biggest audit risk? High earners. Taxpayers reporting over $10 million in income saw an audit rate of 2.4% in 2020, meaning they were over ten times more likely to get audited than the average filer.
But here’s where it gets interesting. The second most audited group isn’t billionaires. It’s low- and moderate-income earners who claim the Earned Income Tax Credit (EITC).
The National Taxpayer Advocate’s 2022 report found that 8 in 10 audited EITC returns had mistakes, mainly misreported income or incorrectly claimed children. The IRS has a long history of scrutinizing EITC claims, sometimes more aggressively than high-net-worth individuals.
So if you’re making millions or using the EITC, expect extra attention. But plenty of other actions can trigger an IRS audit, and most of them have nothing to do with income. Let’s break them down.
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Reporting Extremely High or Low Income
The IRS isn’t a fan of extremes. If your reported income is way out of line with typical earnings in your industry, you’re on their radar. People making under $25,000 or over $500,000 see more audits than middle-income earners.
Low earners raise suspicions of underreported side income, while high earners attract attention because, well, rich people have a habit of finding creative tax loopholes.
Another red flag? Reporting exactly $0 income for multiple years. While some people genuinely have no earnings, the IRS assumes most adults have some form of taxable income.
If your return shows zero earnings but you’re still paying rent, bills, and buying groceries, they might start wondering where that money is coming from.
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Large Cash Transactions and Deposits
The IRS keeps a close eye on cash. If you deposit or withdraw $10,000 or more in cash at a bank, the transaction gets reported automatically. It’s called a Currency Transaction Report (CTR), and it’s designed to catch money laundering, tax evasion, and illegal activity.
The IRS uses CTRs to monitor for potential illegal activities, but large cash transactions by themselves do not necessarily lead to audits.
Breaking up cash deposits into smaller amounts, say, $9,500 one day, $9,500 the next, won’t help. That’s called structuring, and it’s actually illegal.
Even if you’re running a legitimate cash-heavy business like a restaurant or a convenience store, consistently large deposits can trigger an audit if your reported income doesn’t match up.
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Claiming Too Many Business Deductions
The IRS loves small businesses, but they really love making sure those businesses aren’t sneaking in personal expenses as deductions. If your return is loaded with business write-offs that seem too high for your income, expect questions.
Home offices, travel, meals, and “entertainment expenses” are some of the biggest audit red flags. Let’s say you report $50,000 in income but claim $40,000 in business deductions.
The IRS will want to know how you’re surviving on what’s left. They’ll also check if your business is actually a business, because if you’re running a side hustle that never turns a profit, they might reclassify it as a hobby, which means no deductions.
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Home Office Deduction Abuse
A home office deduction is a great tax break, if you qualify. The IRS has strict rules, and plenty of people bend them. The key requirement? The space must be used exclusively for business.
That means no claiming your couch, kitchen table, or the guest room that also doubles as a gym. Claiming a huge percentage of your home as an office is another audit risk.
For example, if you live in a 1,500-square-foot house but claim 1,000 square feet as a home office, the IRS will want proof. They also check for wage earners falsely claiming this deduction, if you’re a full-time employee working remotely for an employer, you don’t qualify.
It’s important to know that the IRS requires that the home office space be used exclusively and regularly for business purposes, but there is no specific percentage of the home that, if exceeded, will automatically trigger an audit.
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Misreporting Cryptocurrency Transactions
Crypto isn’t anonymous. The IRS made that clear when they started requiring taxpayers to explicitly disclose crypto transactions on their tax returns. If you bought, sold, traded, or received crypto in any way, they expect to see it reported.
Major exchanges like Coinbase and Binance send transaction data to the IRS, so pretending those trades never happened is a bad strategy. Failing to report crypto gains or losses is a growing audit trigger.
Even overseas crypto accounts aren’t safe. The IRS treats crypto just like stocks, which means capital gains rules apply. If you’re hoping the IRS isn’t paying attention to digital assets, think again.
Failing to Report Side Gig Income
Freelancers, gig workers, and side hustlers are a growing target for IRS audits. Platforms like Uber, Etsy, and Airbnb report earnings using Form 1099-K or 1099-NEC, so if you fail to report that income, the IRS already knows.
They match reported earnings with tax returns, and if there’s a mismatch, you’re getting a letter. A common mistake? Thinking under $600 means tax-free.
While platforms only issue 1099s for earnings above $600, all income, including cash tips, Venmo payments, and direct bank transfers, is taxable. Skipping this step is one of the most common audit triggers for self-employed workers.
Large Charitable Donations Without Proper Documentation
Charitable deductions are great for lowering taxable income, but excessive donations relative to earnings raise suspicions. The IRS checks if your reported donations make sense compared to your income.
If you claim $30,000 in donations on a $50,000 salary, expect questions. Receipts matter. Donations over $250 require written acknowledgment from the charity, and non-cash donations often need an appraisal.
People who claim huge deductions for donated furniture, cars, or clothing without proof are an easy audit target. Inflating donation values to boost deductions is a common trigger for IRS audits, and it’s an easy one to avoid.
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Taking the Earned Income Tax Credit (EITC) Without Qualifying
The IRS watches EITC claims closely because mistakes happen often. The National Taxpayer Advocate’s 2022 report found that 8 in 10 audited EITC returns had errors, usually involving incorrectly claimed dependents or misreported income.
The IRS doesn’t take this lightly. If an audit finds fraud, penalties apply, and a taxpayer can be banned from claiming the credit for up to 10 years. Income must fall within specific limits, and dependents must meet strict requirements.
People who claim children not legally considered dependents get flagged fast. Fudging income to qualify for a bigger credit is another mistake that leads to audits. The IRS already has W-2s, 1099s, and employer-reported data, so trying to work around the system usually backfires.
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Overstating Business Losses (Especially for Sole Proprietors)
Business owners love deductions, but claiming excessive losses year after year gets attention. The IRS expects businesses to make money eventually. If a sole proprietorship reports losses too often, the IRS might classify it as a hobby, which kills all deductions.
That’s an audit risk nobody wants. A business must show a genuine effort to earn a profit. Running at a loss while still deducting travel, home office expenses, and equipment raises red flags.
The IRS also checks personal expenses disguised as business costs, claiming vacations, entertainment, or luxury purchases as “business expenses” is an easy way to trigger an audit.
Claiming Rental Property Losses Incorrectly
Real estate investors have plenty of tax breaks, but they also get audited often. The IRS limits rental property losses, unless a taxpayer is a real estate professional, meaning at least 750 hours a year spent actively managing properties.
Many landlords claim losses without meeting this rule, which is a problem. Depreciation deductions and exaggerated repair expenses get extra scrutiny. The IRS also looks for personal use of rental properties that weren’t disclosed.
Claiming rental losses while staying in the property or letting family members live there rent-free is a common audit trigger. If a rental property consistently loses money, the IRS may question if it’s truly an investment or just a personal expense disguised as one.
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Rounding Numbers on a Tax Return
Tax returns should be exact. Numbers that end in too many zeroes or fives look suspicious. The IRS assumes people don’t have perfect finances, so seeing $5,000 in business expenses, $10,000 in charitable donations, or $25,000 in income raises doubts.
Precision matters, and estimates are an audit red flag. Income, deductions, and credits should match official tax documents like W-2s, 1099s, and receipts.
If a tax return includes rounded numbers on multiple line items, the IRS might assume other parts of the return aren’t accurate either. An audit can follow if they decide to take a closer look.
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Excessive Gambling Winnings Without Reporting Losses Correctly
Casinos and sportsbooks report winnings to the IRS. If gambling earnings are significant but losses aren’t properly documented, an audit risk increases.
The IRS allows gambling losses to be deducted only up to the amount of winnings, and only with detailed records, receipts, and logs. Missing paperwork? No deduction. People who claim large gambling deductions without proving losses attract attention.
The IRS knows most gamblers don’t keep track of every bet. Reporting only the wins and skipping the losses can result in penalties. Claiming gambling as a business is another risky move that often leads to an audit.
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High Foreign Bank Account Balances (FBAR & FATCA Violations)
Hiding money overseas is an IRS favorite to crack down on. Any foreign bank account with over $10,000 at any point in the year must be reported on an FBAR (Report of Foreign Bank and Financial Accounts).
Not doing so can lead to huge fines, even if the mistake was unintentional. The Foreign Account Tax Compliance Act (FATCA) also requires foreign institutions to report U.S. account holders.
That means the IRS already knows about many unreported accounts before audits happen. People who fail to report overseas income, foreign trusts, or offshore investments are playing with fire. The penalties for non-disclosure are no joke.
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Failing to Report Stock Sales and Capital Gains
Brokerages send Form 1099-B to both the IRS and taxpayers. If capital gains or stock sales aren’t reported, the IRS knows. They match reported transactions with tax returns. A missing trade or an attempt to lower taxable income by omitting sales is a red flag.
Wash sales, where stocks are sold and repurchased within 30 days for tax advantages, are another trigger. If the IRS suspects gains were miscalculated or losses were overstated, an audit becomes more likely.
With trading apps making investing easier than ever, people forget that every sale, dividend, and capital gain needs to be reported.
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Filing Too Many Amended Returns
Fixing tax mistakes is fine, but filing multiple amended returns can make the IRS wonder why so many corrections are needed. If adjustments consistently lower tax liability, it might appear intentional.
Amending past returns to claim extra deductions or refunds can spark a closer review. Frequent amendments also slow down processing and trigger additional IRS scrutiny.
If a tax return keeps changing, the IRS might decide it’s worth looking into why those mistakes keep happening. Once that happens, a deeper audit isn’t far behind.
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Failing to Report Alimony or Child Support Properly
Divorce settlements come with tax rules, and messing them up can lead to IRS attention. Alimony payments from agreements finalized after 2018 are no longer deductible for the payer and no longer taxable for the recipient.
People who still try to claim alimony deductions under old rules can expect problems. Child support, on the other hand, has never been deductible or taxable. Some filers still mix up alimony and child support, leading to errors that invite audits.
Any financial agreement involving spousal or child support payments should match IRS guidelines to avoid unnecessary scrutiny.
Using Tax Shelters or Offshore Accounts Aggressively
The IRS actively targets tax shelters and structures designed to lower tax liability through offshore accounts, trusts, and shell companies. If an investment or business arrangement looks like a way to hide taxable income, an audit is possible.
Foreign tax havens draw even more attention. The IRS tracks transactions involving countries known for banking secrecy. People using these strategies without the right legal setup risk audits, back taxes, and penalties.
Large deductions tied to questionable tax avoidance methods often lead to deeper investigations.
While the IRS does scrutinize abusive tax shelters and undisclosed offshore accounts, not all use of offshore accounts is illegal. Proper reporting and compliance are key.
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Filing Late or Not Filing at All
Missing a tax deadline without an official extension means penalties. The IRS automatically issues notices to late filers, and prolonged delays increase the chances of enforcement actions.
Even if a tax bill is owed, filing on time avoids extra fees and unnecessary attention. Not filing at all is a bigger problem. The IRS has access to employer-reported income, brokerage statements, and other financial data.
If required to file but no return appears in their system, they will eventually come looking. People who ignore tax obligations for multiple years can face audits, liens, or worse.
Smart Taxes, Fewer Headaches
Most tax returns never get a second look, but that doesn’t mean the IRS isn’t watching. The best way to stay off their radar is simple, report income accurately, keep solid records, and avoid moves that scream audit red flag.
Trying to outsmart the system usually backfires, and fixing an IRS problem is way worse than filing taxes right the first time. The IRS has access to more data than ever, so mistakes, exaggerations, and missing numbers don’t go unnoticed for long.
A little extra effort now saves a lot of stress later. Play it smart, and keep your money where it belongs, in your pocket, not in an audit.
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