What Triggers an IRS Tax Audit: Red Flags That Put Your Return at Risk
Most tax returns pass through the IRS system without any issues. But some returns stand out. Certain patterns, missed entries, or unusual claims can increase the chance of extra scrutiny. If you’ve ever wondered what triggers an IRS tax audit, you’re not alone. The IRS looks for inconsistencies and mismatches that suggest a second review might be necessary.
An audit doesn’t automatically imply you did something wrong. It simply means the IRS wants more information. When you understand how audits start, you avoid common mistakes and file confidently, especially if you live abroad.
How IRS Audits Work
The IRS reviews tax returns using a mix of automated scoring systems, computer matching, and human review. Every return receives a “score” based on how different or unusual it looks when compared with taxpayers in similar income brackets.
High-scoring returns move to the next level, where an examiner checks for mismatched income forms, incomplete entries, or deductions that appear too large for your income. If something looks off, the IRS sends an audit notice.
Types of audits include:
Here are the four types of tax audits the IRS commonly conducts.
- Mail audits asking for supporting documents
- Office audits, where you meet with an examiner
- Field audits that take place at your home, business, or your tax professional’s office
No matter the format, the IRS wants to confirm one thing: your return matches your records.
Common IRS Audit Triggers
Several issues increase the chances of IRS attention. While you can’t remove every risk, you can avoid unnecessary triggers with careful reporting.
1. High Income and Complex Returns
Higher earners don’t automatically get audited, but they do draw more scrutiny. As your income increases, your returns often include more complex transactions, such as capital gains, stock options, business income, real estate, or foreign assets. Each item adds potential mismatches or calculation errors.
2. Unreported or Underreported Income
The IRS receives copies of your income forms, including:
- Wage statements
- Contractor payments
- Brokerage 1099s
- Interest and dividends
- Platform income from apps such as Upwork, Uber, or PayPal
The IRS compares these forms with your return. If something doesn’t match or doesn’t appear at all, the system flags it. Underreported income remains one of the most common audit triggers because the IRS relies heavily on automated matching.
This includes foreign income. If you earn money abroad, the IRS expects you to report it, regardless of where it was earned or paid.
3. Math Errors and Missing Information
Simple mistakes can still cause headaches. A wrong digit in your Social Security Number, missing schedules, or a mismatched total can disrupt IRS processing. While many mistakes lead only to a notice, others push your return into a review queue.
Electronic filing reduces errors, but you still need to double-check entries before submitting.
4. Too-Large or Unusual Deductions
Deductions must be both ordinary and necessary. When your deductions seem too high for your income level or significantly exceed typical amounts in your occupation, the IRS may question them.
Common deduction areas that trigger audits include:
- Charitable contributions that are far above average
- Large medical deductions
- High business expenses
- Losses that offset most of your income
The IRS compares your claims with national averages for similar taxpayers. A single large deduction won’t automatically cause an audit, but repeated or extreme deductions without clear documentation can spark a review.
5. Schedule C Issues for the Self-Employed
Self-employed taxpayers often deal with higher audit risk because they control their income reporting and expenses. The IRS watches for:
- Underreported income
- Overstated deductions
- Missing receipts or logs
- Personal expenses claimed as business use
- Vehicle claims showing 100% business use
Business owners should expect closer attention, especially when reporting losses for multiple years.
6. Home Office Deduction Problems
The home office deduction remains legitimate, but the IRS expects strict compliance. Your workspace must be used regularly and exclusively for business.
If your home office doubles as a guest room or personal space, claiming it may increase your audit risk. Use accurate square footage, keep receipts, and document shared expenses clearly.
7. Hobby Activities Labeled as Businesses
The IRS distinguishes between hobbies and businesses based on the profit motive. If you routinely lose money while reporting the activity as a business, the IRS may question whether you’re claiming deductions for something you simply enjoy.
To avoid this, keep businesslike records and demonstrate a reasonable expectation of profit.
8. Cryptocurrency Activity
Crypto transactions create audit exposure because most taxpayers don’t track their trades accurately. When you sell, trade, or convert digital assets, you must report each transaction, even if the platform doesn’t send a tax form. The IRS continues to prioritize digital asset compliance.
Additional Audit Triggers for Expats
Expats face unique reporting obligations. Even when your income comes from outside the United States, you still must report it. The IRS looks closely at foreign income, foreign accounts, and international business activity.
9. Foreign Bank Accounts and Assets
If you hold more than $10,000 across foreign financial accounts at any point during the year, you may need to file separate foreign account reports. You may also be required to disclose foreign assets on additional IRS forms.
The IRS compares your return with foreign financial data collected under international agreements. Missing foreign income or unfiled reports increases audit risk.
10. Foreign Earned Income Exclusion Errors
The foreign earned income exclusion helps qualifying expats reduce their taxable income. But the tests for qualification involve strict day-count rules and residency standards. Errors in travel dates, overlapping housing claims, or incorrect exclusions often draw attention from IRS examiners.
11. Foreign Tax Credit Miscalculations
The foreign tax credit helps prevent double taxation, but it involves complex categories and allocation rules. Overstated credits or misclassified income categories can trigger reviews, especially when your credit wipes out most of your U.S. tax.
How To Lower Your Audit Risk
You can’t eliminate audit risk entirely, but you can significantly reduce it with strong habits.
- Report all income, including foreign earnings and platform income
- Avoid round numbers and use actual figures from statements
- Keep receipts, invoices, and logs for all deductions
- Maintain accurate foreign account information
- Prepare business records that separate personal and business spending
- Review your return for missing schedules and details
If something unusual appears on your return, keep extra documentation. Strong records help you answer questions quickly if the IRS contacts you.
What To Do if You Receive an Audit Notice
Getting an audit notice can feel overwhelming. But a steady approach turns a stressful moment into a manageable one.
- Read the notice carefully. Identify which items the IRS wants to review.
- Note the deadline. Late responses limit your options.
- Gather the right documents. Organize receipts, bank statements, foreign records, and business logs by issue.
- Avoid sending unnecessary documents. Keep your response focused on what the IRS requested.
- Work with a qualified tax professional. Representation helps you avoid missteps and keeps communication efficient.
Most audits end smoothly when you respond clearly and on time.
Frequently Asked Questions
1. Does claiming large deductions automatically trigger an IRS audit?
Not automatically. The IRS compares your deductions to others in similar income brackets. If your deductions stand out, you’ll need strong documentation to support them, but large deductions alone don’t guarantee an audit.
2. Do expats get audited more often than taxpayers who live in the U.S.?
Not necessarily, but expats face more reporting requirements, which means more opportunities for errors. Foreign accounts, foreign income, and multiple tax systems create complexity. That complexity increases audit risk when details don’t line up.
3. Can cryptocurrency transactions lead to an IRS audit?
Yes, especially if exchanges report information that doesn’t appear on your tax return. The IRS now treats digital assets as a priority area. Full reporting of buys, sales, and earned income keeps your risk low.
4. Will missing a single Form 1099 trigger an IRS audit?
It often triggers a notice, and sometimes a review. The IRS automatically matches income forms to your return. When a form doesn’t match, the IRS contacts you to correct the discrepancy.
5. Does claiming the foreign earned income exclusion raise my audit risk?
The exclusion itself doesn’t raise risk, but errors within the qualification tests do. Travel days, residency rules, and overlapping deductions often cause mistakes. Accurate records keep this from turning into a problem.
6. How far back can the IRS audit my returns?
The IRS usually audits up to three years of returns. They can go back six years if they believe you underreported your income significantly. In cases involving fraud or no filed return, the IRS has no time limit.
Be Prepared for a Possible IRS Audit
Though it may sound alarming, a tax audit is not something to be feared if you report your income correctly and file your returns on time. However, the process can be stressful. By being aware of what triggers a tax audit, you can avoid being the subject of one.
If you want help reducing your audit risk or need support after receiving an IRS letter, Tax Samaritan is here to guide you. Our team works with expats every day, helping them file accurate returns, correct past issues, and handle IRS questions with clarity and confidence.
Request a free 30-minute consultation here.
