Tax Audit Red Flags And How to Avoid Them

Written by Top Dog Tax Relief          
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Overview

Every year, the Internal Revenue Service (IRS) reviews thousands of tax returns. Although the chances of being audited remain low for many (under 1 %), there are specific patterns, errors, and deductions that raise red flags and increase the likelihood of a closer look. At Top Dog Tax Relief, we help taxpayers understand what triggers audits and how to stay compliant. Below are some of the most common audit triggers for individual filers and practical steps you can take to minimize your risk.

Key Takeaways

  • The IRS flags returns that don’t match reported data. Missing or underreported income, especially from side gigs, gig-economy payments, or investments, is one of the most common audit triggers for individuals.

  • Unusually large or inconsistent deductions raise red flags. High charitable contributions, home office claims, or other big write-offs that don’t align with your income level or past filings often attract IRS attention.

  • Accuracy and documentation are your best defense. Keeping detailed records, reporting income honestly, and avoiding “too perfect” numbers dramatically reduce the chances of an audit and make the process easier if one does occur.

1. Reporting Un- or Under-Reported Income

The IRS receives income reports from employers, banks, 1099s, etc., and matches them against what you report. If there’s a mismatch, that’s a major red flag.

What this looks like: You earned side-gig income, gig economy payments, rental income, or crypto transactions but didn’t report it.

How to avoid it:

  • Gather all W-2s, 1099s, 1099-Ks, and other income records.
  • Ensure your tax return includes all sources, even small ones.
  • Use tax filing software or a tax pro that cross-checks for these.

2. Large Deductions or Expenses That Don’t Match Your Income or Activity

If your deductions look unusually large for your income level, or far different from peers in your bracket, the IRS may flag it.

Examples: Charitable contributions that are very high relative to your earnings, renting properties that show big losses year after year, and miscellaneous expenses that are hard to substantiate.

How to avoid it:

  • Keep receipts, written acknowledgements, and separate documentation.
  • Ensure deductions are reasonable for your lifestyle/income.
  • Avoid “rounding” too much (e.g., claiming exactly $5,000 every time), which can look like estimation.

3. Home Office or Vehicle Expense Misuse

Deductions for home offices or vehicles are valid, but they are commonly scrutinized.

What triggers issues: Claiming “100% business use” of a car when you use it for personal tasks; claiming a portion of your home as “exclusively” business when it’s not.

How to avoid it:

  • Keep a mileage log for vehicle use.
  • For your home office, the space must be used exclusively and regularly for business.
  • Document the square footage and how you calculated the deduction.

4. Significant Year-to-Year Income Changes or Unusual Patterns

A sudden spike in income, or a sudden drop, can catch the IRS’s attention because it strays from statistical norms.

What it might be: You had a one-time large bonus, sold assets, or started a new side business, but you didn’t explain or document it.

How to avoid it:

  • If there’s a major change, document the reason (new job, sale of property, inheritance, etc.).
  • Avoid big jumps in deductions without corresponding income changes.
  • If you file an amended return or make a change, attach a brief explanation or keep records.

5. Claiming Refundable Credits or Dependents Incorrectly

Certain credits (for example, the Earned Income Tax Credit) and dependent claims are among the more heavily reviewed areas.

How it triggers audits: If you claim a dependent who doesn’t meet the rules, or the value of your refundable credit seems out of line with the income you reported.

How to avoid it:

  • Be sure you meet all eligibility criteria for any credits.
  • Keep documentation for dependents (birth certificates, school records, custody papers, etc.).
  • Report credits accurately and don’t assume “everyone does this.”

6. Foreign Assets, Crypto Transactions, or Other Less Transparent Income Sources

Income and assets that are reported outside of typical U.S. forms may increase audit risk.

Examples: Foreign bank accounts, overseas real estate, undisclosed crypto gains, peer-to-peer payment income not reported on a 1099.

How to avoid it:

  • File necessary forms (e.g., FBAR, FATCA, etc.) if you have foreign assets.
  • Keep records of cryptocurrency transactions and report gains/losses.
  • Make sure side-income via apps (PayPal, Venmo, etc.) is captured and reported.

7. Round Numbers or Perfect-looking Figures

Believe it or not, the IRS can flag returns where numbers are suspiciously neat (lots of zeros, all round numbers) because that may indicate estimation or poor record-keeping.

How to avoid it:

  • Report accurate figures from your records; don’t just estimate.
  • If you must estimate, document how you did it and keep a backup (but an accurate figure is always better).
  • Use tax software or a pro to reduce this risk.

Final Thoughts

An audit notice doesn’t automatically mean wrongdoing; it simply means the IRS wants to review your return and records. But the key to avoiding audits (or handling them smoothly) is preparation, accuracy, and documentation.

If you’re unsure about your return, worried about audit risk, or want peace of mind this filing season, contact us today for a free consultation.