Each year, the Internal Revenue Service (IRS) audits a small percentage of taxpayers. However, certain behaviors and discrepancies significantly increase the odds of being selected for an audit. In 2025, the IRS continues to use increasingly sophisticated data analytics to detect anomalies in tax returns, making it critical to understand what triggers an audit.
From high-income individuals to small business owners and U.S. expats, every taxpayer should be aware of the red flags that could result in unwanted IRS attention. By taking a closer look at these triggers, it becomes possible to proactively avoid mistakes and file taxes with confidence.
1. Major Income Discrepancies
The IRS receives copies of all income forms, including W-2s, 1099s, and various K-1 schedules. When reported income on a tax return doesn’t match the amounts reported to the IRS by employers, clients, or financial institutions, a discrepancy is automatically flagged.
This is one of the most common audit triggers, especially for individuals with multiple income sources. Gig workers, freelancers, and investors must be particularly vigilant. Submitting a return through a reliable online tax filing service that double-checks each income source can help minimize these errors.
Common causes:
- Forgetting to report freelance or gig income
- Not including dividend or investment income
- Errors in inputting wage details
2. Claiming Excessive Deductions
Large deductions that are disproportionate to the taxpayer’s income often prompt further investigation. For instance, if a person earning $50,000 claims $30,000 in charitable contributions, the IRS algorithm is likely to flag the return.
Deductions should always be reasonable and substantiated with records. Business owners and freelancers, in particular, need to ensure expenses are genuinely business-related. Oversights can be avoided by leveraging professional tax services tailored to various industries.
Red flag deductions:
- Large home office deductions
- Excessive charitable donations without receipts
- Travel and meal expenses not directly related to business
Further details on allowable deductions can be found in this guide on USA tax deductions for 2025.
3. Cash-Based Businesses and Self-Employment
Those operating cash-intensive businesses such as restaurants, salons, or convenience stores face a higher likelihood of scrutiny due to the ease of underreporting income. Similarly, sole proprietors who file Schedule C are often audited when losses are claimed repeatedly or profit margins are suspiciously low.
Proper documentation of income and expenses, paired with structured accounting, helps validate claims. Businesses can improve compliance by utilizing company tax filing services that adhere to federal and state-level tax regulations.
Common mistakes:
- Underreporting earnings
- Claiming personal expenses as business deductions
- Failing to issue or report 1099s
4. Excessive Business Losses Over Multiple Years
A business claiming net operating losses over several consecutive years may attract attention. The IRS may investigate whether the activity qualifies as a business or is merely a hobby.
To protect against this trigger, it’s important to maintain a clear business plan, consistent operations, and financial evidence supporting the expectation of profitability. Independent audits or assurance services can further strengthen the return’s integrity.
5. Cryptocurrency Transactions
With the rising popularity of cryptocurrencies, the IRS has implemented tighter reporting rules. Failing to disclose transactions involving Bitcoin, Ethereum, or other digital currencies could result in both penalties and an audit.
Every taxpayer must now answer questions about crypto holdings on IRS Form 1040. Accurate reporting of digital asset gains, losses, and exchanges requires familiarity with the current regulations. Advisory firms offering transaction and corporate finance solutions are instrumental in ensuring compliance.
6. Claiming Dependents Incorrectly
Conflicting dependent claims often between divorced or separated parents—remain a consistent audit trigger. Only one taxpayer can claim a dependent for a given tax year, and the IRS cross-checks Social Security Numbers and custody documents to validate these claims.
Eligibility guidelines must be followed meticulously. When filing for dependents, accurate status documentation is essential. Legal support from tax-focused legal services can resolve disputes and prevent costly mistakes.
7. Foreign Income and Expatriate Accounts
Taxpayers who live abroad or hold foreign bank accounts are under increased scrutiny due to global tax transparency agreements. The Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR) require full disclosure of foreign financial holdings.
Failure to comply can lead to penalties ranging from thousands of dollars to criminal charges. Those with offshore interests are strongly encouraged to file using U.S. expat tax services designed to navigate complex cross-border regulations.
For a deeper overview, explore this U.S. expat tax filing guide.
8. Round Numbers or Estimates
Filing returns with multiple rounded figures such as claiming $5,000 for office expenses or $2,000 in vehicle costs appears unnatural to IRS reviewers. Authentic financial records are rarely that clean.
Using estimates instead of exact amounts may imply poor recordkeeping or intentional manipulation. Accurate reporting can be ensured by consulting business consulting services that specialize in tax strategy and record validation.
9. Amended Returns and Frequent Changes
While amending a tax return is sometimes necessary, frequent amendments raise questions about a taxpayer’s accuracy and reliability. Each amendment invites additional scrutiny, especially if the revised return yields a larger refund.
Accuracy on the first submission is key. Taxpayers unsure about deductions, filing status, or income classification should consider a second review through structured tax preparation services before filing.
10. High-Income Individuals Over $200,000
Statistically, taxpayers earning more than $200,000 annually are audited at a higher rate. The IRS assumes that higher earnings may come with complex deductions, capital gains, offshore investments, and business activity all of which increase the chance of errors.
Though earning more is not a risk in itself, high-income filers are encouraged to seek expert assistance for complete and compliant returns.
Frequently Asked Questions (FAQs)
Why does the IRS audit tax returns?
The IRS conducts audits to ensure taxpayers accurately report income, claim legitimate deductions, and comply with tax laws. Audits are often triggered by discrepancies, unusual patterns, or random selection.
How can I reduce the risk of an audit?
Double-check all income sources, avoid inflated deductions, and maintain documentation for every claim. Using an IRS-authorized tax filing provider helps ensure returns are accurate and compliant.
What happens if I’m audited?
The IRS will request documentation to verify items on the return. This may involve written correspondence or an in-person meeting. It’s recommended to have a tax advisor or representative handle communications to avoid errors or misstatements.
Are audits more common for self-employed individuals?
Yes. Self-employed individuals filing Schedule C are audited more frequently due to the higher risk of underreported income and overstated deductions. Ensuring accurate accounting is essential.
Do I need to report crypto even if I have losses?
Yes. All crypto transactions, including losses, must be reported to the IRS. Accurate reporting ensures tax compliance and the ability to deduct capital losses where allowed.
Conclusion
Understanding the key IRS audit triggers can help taxpayers in 2025 file more accurate and defensible returns. Whether it’s income mismatches, high deductions, crypto reporting, or expat income, each red flag carries risk.
Proactive planning, clear documentation, and professional support make a significant difference. Filing taxes through a secure, IRS-authorized platform not only reduces audit risk but also streamlines the entire process for individuals and businesses alike.For further information about individual or business tax services, explore the full range of solutions available.
