The IRS audits less than 1% of all tax returns each year—but that doesn’t mean audit selection is random. Certain factors significantly increase your chances of receiving that dreaded audit notice. Understanding these triggers isn’t about finding ways to cheat the system; it’s about knowing what draws IRS attention so you can document properly and file accurately.
Every year, the IRS processes over 150 million individual tax returns. With limited resources, they must strategically select which returns to examine. Their selection methods have evolved over decades, using sophisticated computer algorithms, data matching systems, and statistical analysis to identify returns most likely to yield additional tax revenue.
Whether you’re a high-income earner, a small business owner, or simply someone claiming legitimate deductions, knowing what the IRS looks for helps you prepare. The goal is compliance, not avoidance, claiming everything you’re entitled to while maintaining documentation that can withstand scrutiny.
How the IRS Selects Returns for Audit
The IRS doesn’t simply pull returns out of a hat. They use sophisticated systems and multiple selection methods to identify returns worth examining.
The DIF Score System
The Discriminant Information Function (DIF) is the IRS’s primary audit selection tool. This computer-based system assigns a score to every return based on the likelihood that an audit will result in additional tax revenue. The DIF compares your return against statistical norms for taxpayers with similar income, occupation, and filing characteristics.
Returns that score outside normal parameters (whether due to unusually high deductions, inconsistent income patterns, or other anomalies) receive higher DIF scores and are more likely to be selected for examination. The exact formula is a closely guarded IRS secret, but general patterns have emerged from years of audit data.
The DIF system is remarkably effective. Returns selected through DIF scoring result in tax changes approximately 75-80% of the time, compared to much lower rates for randomly selected returns. This efficiency is why the IRS continues to invest heavily in refining their statistical models.
Other Selection Methods
Beyond the DIF system, the IRS selects returns through:
- Document Matching: The IRS receives copies of your W-2s, 1099s, and other information returns. When these don’t match what you reported, automated systems flag your return for review.
- Related Examinations: If the IRS audits a business partner, investor, or employer and finds issues, they may examine related taxpayers’ returns.
- Random Selection: A small number of returns are selected completely at random for the National Research Program, which helps the IRS calibrate their DIF formulas.
- Informant Tips or Whistleblower Awards: The IRS receives tips from former spouses, disgruntled employees, business competitors, and others. Credible tips can trigger audits. The office pays monetary awards to eligible individuals whose information is used by the IRS. The award amount generally is 15 to 30% of the proceeds collected and attributable to the whistleblower’s information.
Top 15 IRS Audit Triggers
Based on IRS data and audit patterns, these are the most common factors that increase audit risk:
1. High Income
Income level is the single strongest predictor of audit risk. According to IRS Data Book statistics, taxpayers earning over $1 million face audit rates of 1% to 11%, compared to less than 0.5% for those earning under $200,000. The IRS concentrates resources where the potential tax recovery is highest.
2. Unreported Income
This is the most common audit trigger. The IRS receives copies of every W-2 and 1099 issued to you. When the income on your return doesn’t match these documents, their automated Automated Underreporter (AUR) system flags the discrepancy. Even small mismatches can trigger correspondence.
3. Excessive Deductions Relative to Income
The DIF system compares your deductions to others in your income bracket. Deductions that seem disproportionate (such as claiming $50,000 in charitable donations on $100,000 income) will flag your return. This doesn’t mean you can’t claim large deductions; it means you need solid documentation.
4. Large Charitable Donations
Charitable contributions exceeding 3-5% of your adjusted gross income draw attention, especially non-cash donations. The IRS scrutinizes donations of vehicles, art, real estate, and other property where valuation is subjective. Always obtain written acknowledgments and qualified appraisals when required.
For non-cash donations over $5,000, you need:
- Qualified appraisal
- Form 8283 (Section B), fully signed
- Written acknowledgement from the charity
- Proper records kept (even if not filed)
5. Home Office Deduction
The home office deduction requires that the space be used “regularly and exclusively” for business. This is a historically abused deduction, so the IRS watches it closely. Common mistakes include claiming a space that’s also used for personal purposes or overstating the square footage.
6. Business Losses Year After Year
The IRS applies “hobby loss” rules to activities that consistently lose money. If your business doesn’t show a profit in at least 3 of the last 5 years, the IRS may classify it as a hobby and disallow the losses. This particularly affects side businesses, farms, and creative pursuits. Document your profit motive through business plans, marketing efforts, and operational changes.
7. Cash-Heavy Businesses
Restaurants, bars, salons, retail stores, and other businesses dealing primarily in cash face elevated audit risk. The IRS knows cash is harder to trace and uses bank deposit analysis, industry benchmarks, and lifestyle audits to verify reported income. If you operate a cash business, meticulous bookkeeping is essential.
8. Self-Employment and Schedule C
Self-employed individuals filing Schedule C face higher audit rates because they control both income reporting and expense deductions. The IRS recognizes that self-employment income is a major contributor to the “tax gap.” Common issues include mixing personal and business expenses, inadequate documentation, and aggressive deductions.
9. Earned Income Tax Credit (EITC)
Despite being intended for lower-income taxpayers, EITC claims face some of the highest audit rates—often due to complex eligibility rules and high historical error rates. The IRS estimates that between 21% and 26% of EITC claims contain errors, resulting in billions of dollars in improper payments annually.
If you claim this credit, ensure you meet all requirements for income limits, filing status, and qualifying children. The rules around qualifying children are particularly complex, involving age, relationship, residency, and support tests. Keep documentation of your living arrangements, school records, and other evidence proving eligibility.
10. Round Numbers on Returns
Reporting exactly $5,000 in travel expenses or $10,000 in supplies looks like estimation rather than actual record-keeping. Use actual amounts from your records. While rounding to the nearest dollar is acceptable, round numbers in large amounts suggest you’re guessing rather than documenting.
11. Foreign Accounts and Assets
The IRS has dramatically increased enforcement of foreign account reporting. If you have foreign bank accounts exceeding $10,000 in aggregate at any point during the year, you must file an FBAR (FinCEN Form 114). Certain taxpayers must also file Form 8938 for foreign financial assets. Failure to report can result in severe penalties, sometimes exceeding the account balance.
12. Rental Property Losses
Rental real estate losses are generally limited by passive activity loss rules unless you qualify as a real estate professional or meet the active participation exception. Claiming real estate professional status is subject to increased IRS scrutiny because it allows losses to offset non-passive income, including W-2 wages. To qualify, the IRS requires that you spend more than 750 hours and more than half of your total working time materially participating in real estate activities during the year. Taxpayers with a full-time W-2 job may find it difficult to meet these requirements. For more details, see our rental property tax deductions guide.
13. Business Use of Vehicle
Claiming 100% business use of a vehicle is a red flag because it’s rare for any vehicle to never be used personally. The IRS expects to see some personal use unless you have a dedicated work vehicle that never leaves the job site. Maintain a contemporaneous mileage log showing date, destination, business purpose, and miles driven for every business trip.
14. Math Errors and Inconsistencies
Simple math errors don’t always trigger full audits, but they do trigger IRS attention and correspondence. More concerning are inconsistencies between forms like wages on your return not matching your W-2, or Schedule C income not flowing correctly to your 1040. These errors suggest carelessness that may extend to other areas.
15. Amended Returns with Large Refund Claims
Filing an amended return (Form 1040-X) that claims a large additional refund draws attention, especially if filed close to the statute of limitations deadline. Multiple amended returns for the same year or amendments that drastically change your tax picture may trigger examination of both the original and amended returns.
Who Faces the Highest Audit Risk?
High-Risk Taxpayer Categories
Based on IRS audit statistics, these groups face the highest audit rates:
| Taxpayer Category | Approximate Audit Rate |
| Income over $10 million | 4% – 11% |
| Income $1 million – $10 million | 1% – 2% |
| EITC claimants | 0.7% – 1.5% |
| Schedule C filers with losses | 1% – 2% |
Compare these to the overall individual audit rate of approximately 0.4%. If you fall into multiple high-risk categories—say, a high-income self-employed individual with rental property losses—your audit odds compound.
How to Reduce Your Audit Risk (Legitimately)?
Documentation Best Practices
The best audit protection is thorough documentation:
- Keep receipts for all deductible expenses, especially those over $75
- Maintain contemporaneous records (created at the time of the expense, not reconstructed later)
- Document the business purpose of every business expense
- Save bank and credit card statements that corroborate your records
- Keep records for at least 7 years (the IRS recommends 3-7 years depending on the situation)
- Store digital copies of important documents in case originals are lost
Filing Strategies
Smart filing practices reduce errors and audit risk:
- File accurately and on time: Late filings and errors attract attention. File an extension if needed rather than rushing.
- E-file your return: Electronic filing has lower error rates than paper. Software catches math mistakes and inconsistencies.
- Use a tax professional for complex returns: If you have business income, investments, or rental properties, a professional tax preparer reduces errors and ensures proper documentation.
When Audit Triggers Are Worth the Risk?
Legitimate Deductions You Shouldn’t Skip
Fear of audit should never stop you from claiming legitimate deductions. If you’re entitled to a home office deduction, charitable contribution, or business expense—and you have documentation—claim it. The audit risk is manageable; leaving money on the table is guaranteed loss.
The key principles are: claim what you’re legally entitled to, document everything thoroughly, and be prepared to explain your position if asked. Most audits result in no change when taxpayers have proper records.
If you’re unsure whether a deduction is legitimate or how to document it properly, work with a CPA before filing. It’s far easier to get it right the first time than to defend a questionable position during an audit.
Get Professional Help With Your Tax Return
Complex tax situations benefit from professional guidance. Manay CPA helps clients across all 50 states:
- Maximize legitimate deductions while maintaining full compliance
- Document properly to withstand potential audit scrutiny
- Navigate complex situations like self-employment, rental properties, and foreign accounts
- Respond effectively if an audit does occur
Want to ensure your return is audit-ready? Contact Manay CPA for tax preparation and planning services.
Frequently Asked Questions
What percentage of tax returns get audited?
The overall audit rate is approximately 0.4% (about 4 in 1,000 returns). However, this varies significantly by income level and return type. Taxpayers earning over $1 million face audit rates of 1-11%, while EITC claimants face rates around 0.7-1.5%. Most taxpayers with straightforward W-2 income and standard deductions have very low audit risk.
Does using a tax professional reduce audit risk?
Using a professional doesn’t guarantee you won’t be audited, but accurate returns with proper documentation are less likely to raise red flags. Tax professionals also ensure you claim all legitimate deductions correctly and can represent you if an audit does occur. The peace of mind and potential tax savings often outweigh the cost.
Can I be audited for claiming too many deductions?
You can claim any deduction you’re legally entitled to. The key is having proper documentation to support your claims. Deductions that seem disproportionate to your income may trigger review, but if you have proof, you have nothing to worry about. Don’t avoid legitimate deductions out of audit fear—just document them properly.
How long after filing can I be audited?
The IRS typically has 3 years from your filing date to audit your return. This extends to 6 years if you underreported gross income by more than 25%. There’s no time limit for fraudulent returns or returns that were never filed. Most audits occur within 2 years of filing.
References
IRS Data Book – Examination Statistics
IRS Publication 17 – Your Federal Income Tax
IRS – How We Select Returns for Examination
