People get audited by the IRS when something on their return stands out to the agency’s computers or reviewers. The most common IRS audit triggers are income that doesn’t match what employers, banks, and brokerages already reported; deductions or credits that look unusually large for the taxpayer’s income; self-employment returns with repeated losses or aggressive expenses; foreign accounts and digital assets that weren’t properly disclosed; and, in a small share of cases, random selection. Fewer than 0.5 percent of individual returns filed between 2020 and 2023 were audited, but your odds shift sharply depending on what’s on your Form 1040.
How the IRS Chooses Returns
Most selection happens by computer. The Discriminant Function System, known as DIF, scores every return on how its line items compare to similar returns the IRS has examined before. A high score means the return has a strong statistical likelihood of producing additional tax if examined. Returns above a threshold get routed to a human classifier who decides whether to open a case.
Two other channels feed the pipeline. The Automated Underreporter program matches your return against W-2s, 1099s, and similar documents third parties filed with the IRS. And returns tied to another taxpayer under audit, such as a business partner or an investor in the same entity, can get pulled in through that connection. A small number are chosen at random under the National Research Program to calibrate the IRS’s scoring models. If you’re picked that way, nothing on your return was suspicious, but you’ll still need to back up what you filed.
Income That Doesn’t Match Third-Party Records
Every W-2 your employer sends you also goes to the IRS. Same with 1099s from banks, brokerages, and clients. The Automated Underreporter program compares those documents to what you reported. If a brokerage tells the IRS you sold $15,000 in stock and your return doesn’t include the sale, the mismatch is flagged automatically.
The usual result is a CP2000 notice proposing changes. That letter isn’t a bill and isn’t a traditional audit; it’s the IRS saying it believes you owe more and explaining why. You have 30 days to respond if you live in the United States, 60 days if you live abroad. Ignore it and the IRS follows up with a formal Statutory Notice of Deficiency.
Most of these notices trace back to forgotten income: a small freelance gig where the 1099-NEC got lost, an old savings account still paying interest, a brokerage sale the taxpayer didn’t remember. The prevention is simple. Report every document you receive, and if a 1099 looks wrong, ask the payer to correct it before you file.
Deductions That Look Too Large for Your Income
The DIF system is especially sensitive to deductions that fall outside the norm for a given income bracket. Someone earning $60,000 who claims $25,000 in charitable contributions has reported a ratio far above what most filers at that income report. The scoring doesn’t know whether the deduction is legitimate. It only knows it’s unusual, and unusual is worth checking.
Charitable giving, unreimbursed business expenses, and medical costs are the categories that most often push scores into audit range. Large deductions aren’t wrong; they just need proof. Bank statements, canceled checks, acknowledgment letters from charities, and medical billing records all count. Assembling that documentation before you file is far easier than reconstructing it two years later.
Noncash Charitable Contributions
Donating property instead of cash draws extra scrutiny because valuation is subjective. A used car, a piece of art, or a block of stock is worth whatever you can justify, and the IRS knows some taxpayers push. Total noncash donations over $500 require Form 8283. Once any single item or group of similar items exceeds $5,000 in claimed value, you need a qualified independent appraisal attached to the return. Skipping the appraisal can result in the entire deduction being disallowed, even if the value you assigned was reasonable.
Self-Employment and Schedule C Filings
Schedule C filers face more scrutiny than W-2 wage earners because they decide what income to report and which expenses to deduct. That autonomy leaves more room for error, and the IRS knows it.
Repeated Losses and the Hobby Loss Rule
Reporting losses from a side business year after year is one of the clearest triggers for self-employed filers. If an activity turns a profit in at least three of the most recent five tax years, it’s presumed to be a legitimate business. Fall short and the IRS can argue the activity is really a hobby, which means the losses can’t offset your other income. Auditors weigh factors like whether you keep business-like records, how much time you devote to the activity, and whether you’ve adjusted operations to try to become profitable. A photography studio running losses for six straight years while the taxpayer works a full-time day job draws more attention than a new consulting practice that lost money for two years before turning a corner.
Home Office Deductions
The home office deduction requires that the space be used exclusively and regularly for business. “Exclusively” is where most claims fall apart. If your office doubles as a guest bedroom, or the kids do homework at the same desk, the deduction doesn’t qualify. The space doesn’t have to be your primary place of business; you can also qualify by regularly meeting clients there or by using a separate structure like a detached garage or studio. But inaccurate square footage calculations or mixed personal and business use can lead to the entire deduction being denied, not just trimmed.
Cash-Intensive Businesses
Restaurants, salons, laundromats, and similar operations sit near the top of the audit priority list. The IRS uses bank deposit analysis to compare what flows through your accounts against reported revenue. When deposits consistently exceed reported income by a meaningful margin, auditors treat the difference as unreported receipts. Any business receiving more than $10,000 in a single cash transaction must also file Form 8300, and the IRS cross-references those filings against reported income.
Vehicle Expenses
Claiming business use of a personal vehicle is common and frequently challenged. For 2026, the standard mileage rate is 72.5 cents per mile, which makes even moderate driving a meaningful deduction. The catch is the recordkeeping requirement. The IRS wants a contemporaneous log, created at or near the time of each trip, showing the date, destination, business purpose, and miles driven. Entries like “client meetings, approximately 200 miles” don’t survive an audit. Odometer readings at the start and end of the tax year are also required to substantiate total mileage and the business-use percentage.
Earned Income Tax Credit Claims
The EITC is one of the most valuable credits available to lower-income workers, and also one of the most audited items on any return. For tax year 2019, EITC claimants were audited at a rate of 0.78 percent, more than double the 0.29 percent average for all individual filers. The IRS has said resource constraints push it toward correspondence audits of EITC returns, which are cheaper and faster than complex high-income examinations.
These audits overwhelmingly focus on qualifying-child rules. The credit amount depends heavily on whether you have qualifying children, so the IRS often asks filers to prove that a child lived with them for more than half the year. School records, medical records, and childcare statements showing your address usually resolve the inquiry. Keeping these documents organized is worth the effort because the credit amount is large enough that the IRS treats verification as time well spent.
Digital Assets and Cryptocurrency
Every Form 1040 now asks whether you received, sold, exchanged, or otherwise disposed of any digital asset during the tax year. Answering “no” when the IRS has records showing otherwise is a fast route to examination. Starting in 2026, cryptocurrency brokers are required to file Form 1099-DA reporting proceeds from digital asset transactions, feeding straight into the same matching system that catches unreported W-2 and 1099 income.
The most common mistake is treating a crypto-to-crypto swap as a non-event. Trading Bitcoin for Ethereum is a taxable disposition. So is using cryptocurrency to buy goods, and so is receiving tokens through staking or airdrops. Each of these events needs to be reported whether the transaction produced a gain or a loss. With broker reporting in place, the IRS will match reported proceeds against your return the same way it matches a 1099-INT from your bank.
Foreign Accounts and Assets
Holding money or investments outside the United States triggers two separate disclosure requirements the IRS enforces closely.
The first is the Report of Foreign Bank and Financial Accounts, filed as FinCEN Form 114 and commonly called the FBAR. If the combined value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year, you must file. The deadline is April 15, with an automatic extension to October 15 that requires no paperwork to claim.
The second is Form 8938, required under the Foreign Account Tax Compliance Act. Unmarried taxpayers living in the U.S. must file if their foreign assets exceed $50,000 on the last day of the tax year or $75,000 at any point during the year. Higher thresholds apply to joint filers and to those living abroad.
Penalties are steep. Non-willful FBAR violations carry a base penalty of $10,000 per account per year, adjusted upward for inflation. Willful violations are far worse: the greater of $165,353 (the current inflation-adjusted amount) or 50 percent of the account balance at the time of the violation, plus potential criminal prosecution. The IRS receives data directly from foreign financial institutions under FATCA, so assuming an overseas account is invisible is an expensive assumption.
How Long the IRS Has to Audit You
The audit window depends on what the IRS finds.
- Three years is the standard window. The IRS generally must assess additional tax within three years after you filed the return, or after its due date, whichever is later.
- Six years applies if you omit more than 25 percent of the gross income reported on your return.
- There is no limit if you file a fraudulent return or don’t file at all.
These deadlines dictate how long to keep records. For most filers, three years of supporting documents is enough. If you suspect you might have underreported income by a significant margin, keep everything for at least six years. For property, hold records until at least three years after you sell or dispose of it, since you’ll need them to compute the gain or loss. Employment tax records should be kept for at least four years after the tax was due or paid.
What Happens If You’re Selected
Not every audit looks the same. The large majority are correspondence audits handled entirely by mail. The IRS sends a letter identifying specific items it wants documentation for, and you mail back your records. These are usually limited to one or two issues, like a charitable deduction or a missing income item.
Office audits require you to bring records to a local IRS office for an in-person interview. Field audits are the most intensive: an agent visits your home, business, or accountant’s office to review your books. Field audits are rare for individual filers and are generally reserved for complex returns involving businesses, investments, or suspected fraud.
Whatever the format, you have the right to know why the IRS is examining your return, to be treated professionally, and to appeal any findings you disagree with. The IRS Independent Office of Appeals handles disputes through an informal process that costs less and moves faster than court. Going through appeals doesn’t waive your right to litigate later, and mediation is available as an alternative. A tax professional can represent you at every stage, and for anything beyond a simple mailed inquiry, that representation is usually worth the cost.