Why Am I Being Audited? Common IRS Audit Triggers

An IRS audit is a review of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly according to tax laws, and to verify the reported amount of tax is correct. These examinations are not always a sign of a problem, as some are simply routine verification. The reasons for selection are varied, ranging from computer-driven analysis to random chance.

The IRS Selection Process

The majority of tax returns are selected for audit through a computer-based system known as the Discriminant Information Function (DIF). This program analyzes every return and assigns it a numeric score, with a higher score indicating a greater likelihood of an adjustment if audited. The system compares a return against statistical norms derived from a pool of similar returns.

Returns that receive a high DIF score are set aside for further review. At this stage, an experienced IRS examiner will manually inspect the return to determine if the computer-flagged anomalies warrant a full audit. This process filters the initial computer selections down to the returns with the highest probability of containing errors.

A smaller number of audits are initiated through the National Research Program (NRP). The NRP selects a statistically valid, random sample of returns for examination. These audits are comprehensive and are not triggered by any specific item on the return. The purpose of the NRP is to gather data on overall taxpayer compliance, which is then used to update and refine the formulas for the DIF system.

Income Reporting and High-Income Status

One of the most direct triggers for an IRS inquiry is a discrepancy between the income reported on your tax return and the information provided by third-party payers. The IRS operates an automated system called the Information Returns Processing (IRP) program. This system cross-references the income you report with data from forms like Form W-2, Form 1099-NEC for nonemployee compensation, and Form 1099-K for payment card transactions. For tax year 2025, these platforms must issue a Form 1099-K to taxpayers who receive over $2,500 for goods and services.

When the IRP system detects a mismatch, it automatically generates a notice informing the taxpayer of the discrepancy and proposing a change to their tax liability. This requires a response to either accept the change or provide documentation explaining the difference. Failing to report all income documented by these third-party forms is a frequent reason taxpayers receive correspondence from the IRS.

Statistically, the likelihood of an audit increases significantly with income level. Taxpayers with higher adjusted gross incomes (AGI) face greater scrutiny. The IRS focuses more resources on high-income returns because of their complexity and the larger potential for tax adjustments. Returns with an AGI over $200,000 see a noticeable increase in audit rates, and those with incomes over $1 million are examined at a much higher rate.

Commonly Scrutinized Deductions and Credits

Certain deductions and credits are reviewed more frequently due to their complexity and potential for error.

• The Earned Income Tax Credit (EITC) is a prime example. Because the eligibility rules surrounding qualifying children, income thresholds, and filing status are intricate, the IRS often examines returns claiming this credit to verify that all requirements have been met.
• Claiming large charitable contributions, especially when they are disproportionate to your reported income, can attract attention. For non-cash donations over $500, you must file Form 8283. If a single item or group of similar items is valued at more than $5,000, a qualified appraisal is generally required to substantiate the value.
• The home office deduction is another area of focus because of its strict qualification rules. To claim this deduction, a portion of your home must be used “exclusively and regularly” as your principal place of business. The “exclusive use” test is often a point of contention.
• Deducting the business use of a vehicle is also subject to strict substantiation requirements. Claiming 100% business use of a vehicle, especially if it is the only vehicle you own, is a significant red flag. The IRS requires contemporaneous and detailed records, such as a mileage log, to support the business-use percentage claimed.
• Significant deductions for business meals are often reviewed. Taxpayers must prove that these expenses are ordinary and necessary for their business. The rules require documentation of the cost, date, location, and business purpose.

Business and Investment Activity Triggers

Reporting sustained losses from a business activity can trigger an audit to determine if the venture is a legitimate business or a hobby. The IRS “hobby loss rule” presumes an activity is for profit if it has generated a profit in at least three of the last five consecutive tax years. If an activity consistently produces losses, the IRS may reclassify it as a hobby. Under tax law effective through 2025, this means that while all income from the hobby must be reported, none of the associated expenses can be deducted.

Operating a business that deals heavily in cash significantly increases the probability of an audit. Industries such as restaurants, hair salons, and construction are considered cash-intensive. The IRS pays closer attention to these businesses because the opportunity to underreport income is higher when transactions are not automatically tracked.

The IRS has intensified its focus on cryptocurrency and other digital asset transactions. A prominent question on Form 1040 asks every taxpayer about their involvement with digital assets. Answering “yes” to this question while failing to report any corresponding transactions on Form 8949 is a major red flag.

Failing to disclose foreign financial accounts is another serious trigger for IRS scrutiny. U.S. taxpayers with a financial interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 at any time during the year must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The penalties for non-compliance are severe, and the IRS receives information from foreign banks under the Foreign Account Tax Compliance Act (FATCA).

Understanding the Type of Audit

A correspondence audit is conducted entirely by mail and is the most common type of examination. This audit typically focuses on a limited number of specific issues, such as verifying a deduction, a credit, or income reported on a Form 1099. The IRS will send a letter, such as a CP2000 notice, requesting documentation or an explanation for the flagged item. The matter is usually resolved by mailing back the requested information.

An office audit requires the taxpayer to visit a local IRS office. This audit is broader than a correspondence audit but is still typically limited to specific items on the tax return that the IRS has questions about. The audit notice will specify which records and documents the taxpayer needs to bring to the appointment. An IRS examiner will then review the documents and interview the taxpayer.

A field audit is the most comprehensive and detailed examination. In this scenario, one or more IRS agents will visit the taxpayer’s home, place of business, or accountant’s office to conduct a wide-ranging review of financial records. Field audits are generally reserved for more complex situations, such as the examination of a business’s entire financial operation or when the IRS suspects significant issues.