The Tax Times: Top 10 IRS Audit Red Flags: Are You on the Radar?

Is your tax return raising a red flag?

Most taxpayers will never face an IRS audit, but certain patterns on a return make you much more likely to be selected for a closer look. By understanding the most common “red flags,” you can file accurately, claim every deduction you’re entitled to, and still minimize audit risk.

How the IRS Picks Returns

The IRS runs every filed return through a scoring system (often called the DIF score) that compares your income, deductions, and credits to others in similar situations. Returns that look unusually aggressive for their peer group are kicked out for manual review and are more likely to be audited.

Think of it this way: the further your return looks from “normal” for your income level and occupation, the more likely it is to be flagged.

1. Not Filing When You Should (Income)

If you have reportable income and simply don’t file, you are inviting IRS attention. The agency receives W‑2s, 1099s and other information directly from payors, and missing returns with visible income are prime candidates for enforcement and substitute-for-return assessments.

How to reduce the risk:

· File every required return, even if you can’t pay in full.

· Respond promptly to non‑filer notices before the IRS files an estimated return for you.

2. Reporting Too Little Income (Income)

Underreported income is one of the biggest audit triggers. IRS computers automatically match what you report against W‑2s, 1099‑NEC, 1099‑K, 1099‑INT, K‑1s and other forms filed by third parties. If you leave something off, the mismatch can generate a notice or an examination.

How to reduce the risk:

· Track all sources of income, including gig work, side businesses and digital platforms.

· Reconcile your numbers to every tax form you receive before filing.

3. High Income With Aggressive Patterns (Income)

Higher‑income taxpayers face higher audit rates, especially when their returns show large losses, complex activities or deductions that don’t “fit” their income profile. AI‑driven systems now do a better job of spotting outliers among high earners with closely held businesses, significant investments, or multiple K‑1s.

How to reduce the risk:

· Make sure complex items (partnerships, S corporations, trusts) are prepared with solid documentation and professional support.

· Expect more scrutiny if you are in the top brackets and plan accordingly.

4. Foreign Income, FEIE and Housing Exclusion (Foreign ties)

The foreign earned income exclusion and foreign housing exclusion are legitimate but often misunderstood benefits. Claims that don’t clearly meet the physical‑presence or bona fide residence tests—or that swing in and out from year to year—can draw attention.

How to reduce the risk:

· Maintain detailed travel calendars and proof of foreign residence if you rely on these exclusions.

· Coordinate foreign tax credits, exclusions and treaty positions so the return presents a consistent story.

5. Unreported Foreign Accounts and Assets (Foreign ties)

Failing to report foreign financial accounts (FBAR) or specified foreign assets (Form 8938) is a classic red flag. The IRS receives increasing amounts of data from foreign financial institutions under FATCA and information‑sharing agreements and cross‑checks it with filed returns.

How to reduce the risk:

· Disclose all foreign accounts when you exceed the filing thresholds, even if the income is small.

· Address past non‑compliance proactively; penalties for willful failures are severe.

6. Disproportionately Large Charitable Deductions (Deductions & credits)

Charitable giving is encouraged in the tax code, but deductions that look unusually large relative to your income are one of the most common audit triggers. Non‑cash contributions, such as appreciated securities or property, are especially likely to be scrutinized if appraisals and acknowledgments are missing or incomplete.

How to reduce the risk:

· Keep written acknowledgments for gifts of 250 dollars or more and qualified appraisals when required.

· Make sure total giving is realistic for your income level and consistent from year to year, or be prepared to explain real changes.

7. Rental Losses and “Real Estate Professional” Status (Deductions & credits)

Rental real estate losses that routinely wipe out wage or business income are a magnet for IRS attention. Returns claiming real estate professional status to avoid passive loss limits are regularly examined for contemporaneous time logs and actual material participation.

How to reduce the risk:

· Maintain detailed logs of hours and activities for each rental or real estate business.

· Be careful when grouping activities and when claiming that real estate is your primary trade or business.

8. Excessive Self‑Employed and Small‑Business Deductions (IRS transactions)

Schedule C filers and small businesses have more room for judgment, which means more room for the IRS to question whether expenses are ordinary, necessary and truly business‑related. Very high ratios of expenses to income, repeated Schedule C losses, or large write‑offs for vehicles, travel, meals, or “consulting” to family members are frequent audit triggers.

Rounded or “too neat” numbers—10,000 for advertising, 5,000 for supplies, 20,000 for travel—also suggest that estimates, not actual records, are being used.

How to reduce the risk:

· Separate business and personal accounts and keep receipts or digital records to support every significant deduction.

· Avoid making up round numbers; use actual totals from your books.

9. Alimony and Other Sensitive Adjustments (Deductions & credits)

For divorces finalized after 2018, alimony is generally not deductible to the payer or taxable to the recipient; older agreements are treated differently. Mismatches between what one spouse deducts and what the other reports, or incorrectly claiming alimony on a post‑2018 agreement, can lead to questions.

Other above‑the‑line deductions and credits—such as education benefits or child‑related credits—also draw attention when they are unusually large or inconsistent with the rest of the return.

How to reduce the risk:

· Confirm exactly how your divorce decree treats payments and which tax rules apply to your agreement year.

· Keep documentation for education expenses, dependency claims and similar items that the IRS frequently disallows.

10. Virtual Currency and Digital Assets (IRS transactions)

Digital assets are now squarely in the IRS spotlight. There is a dedicated question on Form 1040, brokers must issue new Form 1099‑DA information reports, and the IRS uses advanced data‑matching and AI tools to cross‑check exchange data with individual returns. Failing to answer the digital asset question accurately or omitting taxable crypto sales, staking income, or other transactions is increasingly risky.

How to reduce the risk:

· Keep wallet‑by‑wallet records of buys, sales, swaps, and income events and reconcile them each year.

· Report all taxable events on Form 8949 and Schedule D, even if you did not receive a 1099 from an exchange.

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