Few things cause more stress than receiving a letter from the IRS stating that your tax return has been selected for audit. While some audits are unavoidable, many are triggered by common mistakes or omissions that can easily be prevented. Understanding what raises red flags with the IRS can help you file a cleaner, more accurate tax return—and avoid costly audits.
At Martinez Income Tax, we help clients navigate the complex world of tax preparation with confidence. This article outlines the top reasons why the IRS audits returns and what you can do to minimize your risk.
1. Not Reporting All of Your Income
Failing to report all your income is one of the most common—and most avoidable—reasons taxpayers get audited. The IRS receives copies of nearly all tax forms, including W-2s, 1099s, and other income-related documents. It compares that data to what you file, and if anything is missing, it may trigger an automatic letter audit.
Common oversights include:
- Forgetting old or inactive brokerage accounts
- Missing 1099s from freelance or gig work
- Overlooking distributions from college savings plans or retirement accounts
How to avoid it:
Make sure you’ve received and reviewed all applicable forms before filing. Cross-check your income sources against your bank statements and online payment apps. If you’re self-employed or receive income without a 1099, keep detailed records and report everything—even small amounts.
2. Mishandling Foreign Accounts
Foreign accounts are another major area of concern for the IRS. Under the Foreign Account Tax Compliance Act (FATCA), foreign banks are required to report U.S. account holders to the IRS. In turn, U.S. taxpayers must report foreign assets exceeding $50,000 on Form 8938.
Why this triggers audits:
Foreign accounts are often perceived as a way to hide income. Even honest reporting can draw scrutiny, and non-compliance can result in serious penalties.
How to avoid it:
- If you have foreign accounts or assets, be sure to file Form 8938.
- Report the maximum value of your accounts during the year.
- Provide accurate institutional details and avoid any ambiguity in your filing.
3. Excessive Business Deductions
Self-employed individuals and small business owners are especially prone to IRS audits, particularly when claiming business expenses. The IRS uses industry-specific benchmarks, and if your deductions exceed those norms, your return may be flagged.
Frequent audit triggers:
- High travel and meal deductions
- Personal expenses mixed with business costs
- Deductions for vehicles without documented business purpose
How to avoid it:
Keep business and personal finances strictly separate. For vehicle deductions, log mileage and purpose. For business meals, maintain receipts and notes indicating who attended and the business purpose. Consistency and detailed recordkeeping are your best defenses.
4. Earning More Than $200,000
The more you earn, the more likely your return will attract IRS attention. According to IRS data:
- About 1% of those earning less than $200,000 are audited
- Nearly 4% of those earning over $200,000 face audits
- That jumps to 12.5% for individuals earning $1 million or more
Why high income draws scrutiny:
High-income tax returns are more complex and often include multiple deductions, investments, and income sources—all potential audit points. The IRS also sees higher-income audits as offering greater potential revenue recovery.
How to avoid it:
While you can’t change your income, you can ensure accuracy. Review your tax return carefully, especially if prepared by someone else. If you experience income volatility or report unusual expenses, consider including documentation or notes to preempt questions.
5. Repeated Business Losses
New businesses often run at a loss, and the IRS understands that. But if you consistently report losses year after year, your business may be viewed as a hobby—and your deductions disallowed.
What triggers audits:
- Reporting losses over multiple consecutive years
- Losses that seem excessive compared to income
- Inadequate business activity or recordkeeping
How to avoid it:
Treat your business like a real business. Keep complete, organized records. Track income and expenses accurately. If you’re claiming losses, make sure they’re legitimate and supported by receipts, invoices, or accounting software.
6. Unusual or Questionable Deductions
Some deductions, even if technically allowed, can raise red flags if they seem disproportionate or unsupported. Common examples include:
- Large charitable donations that exceed the average for your income level
- Passive real estate losses without qualifying conditions
- Home office deductions claimed by employees rather than self-employed individuals
How to avoid it:
Always back up your deductions with documentation. For charitable donations, keep receipts and confirmation letters. For home office claims, make sure you meet all IRS criteria. If in doubt, consult a tax professional to ensure your deduction is legitimate.
Conclusion: Stay Proactive, Stay Prepared
While not all audits can be prevented, many are avoidable with diligent recordkeeping, honest reporting, and careful tax planning. The IRS is increasingly data-driven and compares your return against industry norms, statistical patterns, and its own historical data. If you avoid the common red flags outlined above, you can dramatically reduce your chances of facing an audit.
Need help reviewing your tax situation?
At Martinez Income Tax, we specialize in preparing accurate, compliant tax returns that hold up under IRS scrutiny. Whether you’re a high earner, small business owner, or freelancer, our team is here to help you minimize risk and maximize peace of mind.
Call us today or schedule your appointment online to get started with a trusted tax professional.
