8 Red Flags that Could Trigger an IRS Audit

Keeping up with ever-evolving tax laws can be challenging for individuals and small business owners. Because the IRS continuously refines its systems for detecting errors and inconsistencies, it's important to understand potential audit triggers — and how to avoid them. While most taxpayers won't face an audit, certain red flags can increase the likelihood of one. Below are eight areas that may draw the IRS's attention.

1. Reporting Sharp Changes in Income

A sudden, unexplained spike or drop in reported income from one tax year to the next may stand out to the IRS. In particular, large discrepancies might suggest unreported earnings or improper deductions. Of course, there are legitimate reasons for income swings — for example, a successful product launch, a layoff or a major pivot in your business model.

If you experience dramatic changes, it's wise to maintain clear, well-organized records. For instance, if you've pivoted to a new business model that led to a temporary dip in revenue, keep receipts, invoices, contracts and other evidence that backs up your numbers.

2. Not Reporting All Taxable Income

One of the most straightforward audit triggers is failing to report income on your return. Whether from a side job, a freelance gig or a forgotten bank account, neglecting to include even small amounts can lead to suspicion. With reporting requirements on third parties — for example, banks, brokerage firms, online platforms and gig-economy apps — the IRS often receives matching forms, including Form 1099s or other information returns. If what you report differs from the amounts these businesses have reported on your behalf, the discrepancy could lead to an inquiry.

Tip: Keep track of all sources of income, especially if you have multiple income sources.

3. Claiming Excessive or Questionable Business Deductions

Small business owners often worry about deducting too much — or too little. Of course, deducting legitimate business expenses is perfectly legal. Problems arise when taxpayers try to claim personal expenses as business deductions. The IRS may want to investigate if your claimed business deductions appear significantly larger than what's typical for your industry or income level.

For example, claiming 100% of the cost of operating your vehicle for business when you also use it personally can raise eyebrows. Overstating travel and meal expenses is another frequent audit trigger.

If you're unsure how much is reasonable to deduct, consult your tax advisor, who can guide you through the rules and proper recordkeeping.

4. Writing Off Home Office Deductions that Don't Match Reality

The IRS has become vigilant about home office deductions, especially as working from home becomes more common. Claiming a home office is perfectly allowable, provided the space is used regularly and exclusively for business. Where many people run into trouble is mixing personal and business use or not having a genuinely separate area that qualifies as a business-dedicated space.

You may deduct a portion of home expenses — such as rent, mortgage interest, utilities and insurance — based on the percentage of your home you use for business.

5. Deducting Large Charitable Contributions that Don't Meet All Requirements

Charitable giving is admirable, but it can become problematic if your donations seem disproportionately large compared to your income level. Under tax law, there are clear rules for claiming deductions, including the documentation you need to support the value of donated cash, assets or goods. If your return shows unusually high charitable donations — especially without strong substantiation — it may be flagged for review.

Moreover, the IRS can request evidence of these donations, such as receipts from the organization or appraisals for noncash items. Ensuring you have this proof and that the organization is IRS-approved can mitigate your audit risk.

6. Engaging in Cryptocurrency Transactions

Reporting requirements for digital assets (such as cryptocurrency) have grown more stringent in recent years. As a result, cryptocurrency transactions are under increasing scrutiny. The IRS treats cryptocurrencies as property, meaning you must report gains (or losses) from sales or exchanges. If you're trading, mining or receiving crypto as payment, maintain accurate records of each transaction.

If you have digital holdings (or had them at any time during the tax year), you must answer "yes" to the question about digital assets on your tax return. Depending on the details, you may need to file an additional form.

7. Having Foreign Accounts

If you hold bank accounts or assets outside the United States, you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR). Specifically, those who must file have foreign financial accounts where the aggregate value of all such accounts exceeds $10,000 at any time during the calendar year. This includes taxpayers having a financial interest in or signature authority over bank accounts, brokerage accounts or mutual funds in a foreign country.

Failing to report these accounts — intentionally or not — can trigger a deeper look at your tax return. The FBAR filing deadline is April 15 of the following year.

8. Claiming Tax Credits When You're Ineligible

Tax credits, such as the Earned Income Tax Credit, the Child Tax Credit or the American Opportunity Tax Credit, can significantly reduce your tax liability — and sometimes lead to a refund. However, the IRS frequently audits returns claiming these credits because of past fraud and misunderstandings about the eligibility rules. Your return might be flagged if you claim a credit without meeting the specific requirements.

Your tax advisor will ensure you meet the eligibility criteria for any credits you claim, including residency, income thresholds and dependent qualifications.

Protect Yourself

Contact your Porte Brown tax advisor to help ensure you claim every tax break you're entitled to and identify potential red flags. If potential trouble areas — like inadequate documentation — are found, you might be able to correct them before you file.

Ask your tax advisor for help implementing stronger recordkeeping systems. If you adequately organize receipts, invoices and other documentation, you'll be audit-ready if the IRS contacts you. Your tax advisor can also represent you in the event of an IRS or state audit.