Avoiding IRS Red Flags: Common Issues That Draw Attention

No one can tell you exactly what will trigger an IRS audit. The IRS doesn't publish its formulas, and anyone who promises "audit-proof" returns is overselling. What you can do is understand how returns get selected and avoid the common mistakes that create mismatches, questions and letters.

The good news is that most of these issues come down to two habits: report everything, and keep records for what you claim.

How the IRS actually selects returns

The IRS describes two main ways a return gets selected for audit:

Random selection and computer screening. In the IRS's words, "sometimes returns are selected based solely on a statistical formula."
Related examinations. Your return may be selected when it involves "issues or transactions with other taxpayers," such as a business partner or investor whose return is being examined.

Separately, the IRS compares your return to information reported by employers, banks, brokers and payment platforms. A mismatch there often leads to a notice rather than a full audit. Either way, a return that's complete, consistent and documented has less to question.

1. Unreported income

This is the most common problem and the easiest to avoid. Your W-2s, 1099-NEC, 1099-INT, 1099-DIV, 1099-B and 1099-K forms also go to the IRS. If the numbers on your return don't match, the IRS may send a CP2000, a notice proposing changes because third-party information "doesn't match what you reported."

Two points to keep in mind:

Income is taxable even without a form. Under the One Big Beautiful Bill Act, the federal Form 1099-K threshold went back to more than $20,000 and more than 200 transactions. Fewer people will get a 1099-K, but the income is still reportable. Some states have lower thresholds.
Wait for every form. Corrected 1099s and late brokerage statements are common. Filing before you have them is how mismatches happen.

If you freelance or sell online, our gig economy tax tips and crypto reporting guide cover the forms you're likely to see.

2. Round numbers and estimates

A Schedule C showing exactly $5,000 for supplies, $3,000 for travel and $2,000 for phone looks estimated, because it usually is. Estimates are hard to defend if you're asked. Use the actual figures from your receipts, bank and card statements, and bookkeeping software.

3. Large charitable deductions without paperwork

Charitable deductions are fine, but the documentation rules are strict:

Donation	What you need
Any cash gift	A bank record or written communication from the charity
$250 or more (single contribution)	A contemporaneous written acknowledgment from the charity
Noncash property over $500	Form 8283 filed with your return
Noncash property over $5,000	Generally, a qualified appraisal by a qualified appraiser

Donated clothing and household items generally must be in at least good used condition. A large noncash deduction that's out of proportion to your income, with no appraisal or receipts, is the kind of item that's hard to support.

4. Business losses year after year

Startup losses are normal. Losses every year for a decade raise the question of whether the activity is a business or a hobby. The IRS generally presumes an activity is for profit if it shows a profit in at least three of the last five years (two of seven for most horse activities).

If it's a hobby, you still report the income, but the expenses can't be deducted. The IRS weighs factors like whether you run the activity in a businesslike way, keep complete books, put in time and effort to make it profitable, and change methods to improve results. If your side business is real, run it like one. Our article on bookkeeping habits is a good place to start.

5. Claiming 100% business use of a vehicle

Very few people use one car only for business. Driving from home to your regular workplace is commuting, which isn't deductible. If the car is also used for personal errands, you must allocate expenses between business and personal use. The IRS expects records showing the date, mileage, destination and business purpose of each trip. A mileage log kept as you go is far stronger than one rebuilt at tax time.

6. Excessive meals

Business meals are generally only 50% deductible, and they can't be "lavish or extravagant." Large meal totals with no notes on who attended and what business was discussed are hard to support. Keep the receipt and write down the business purpose.

7. Cash-heavy businesses

Restaurants, salons, contractors and other cash businesses need especially clean records. Deposit receipts consistently and keep sales records that match. If your business receives more than $10,000 in cash in one transaction or related transactions, you generally must file Form 8300 within 15 days.

8. Math and data-entry errors

Simple mistakes won't usually trigger an audit, but they do generate notices. When the IRS corrects a mistake, you may get a CP11 (you now owe more) or CP12 (your refund changed). Wrong Social Security numbers, transposed digits and missed schedules all cause delays. E-filing with software and double-checking names and ID numbers prevents most of them.

When it's worth getting help

If you're self-employed, claim large deductions, run a cash business, or have had a notice before, a professional review before you file can catch problems early. If you're already dealing with an IRS letter or audit, read what to do when you get an IRS letter.

Our Enrolled Agents and CPAs can represent you before the IRS through our audit representation service. Book an appointment if you'd like someone to look at your situation.

Sources

General information, not tax advice. Tax rules change and depend on your situation. Figures are for tax year 2026 unless noted; confirm current amounts at IRS.gov or talk to a Stellar Tax professional before acting.