What Are Your Chances Of An IRS Audit? 15 Audit Red Flags To Know Before You File

As tax season approaches, many taxpayers worry about the possibility of an IRS audit.

That concern was heightened after the Inflation Reduction Act provided the IRS with $80 billion in additional funding over 10 years, much of it earmarked for enforcement.

Since then, however, the landscape has changed dramatically:

• Congress has reclaimed much of the IRS’s additional enforcement funding.
• The IRS has lost roughly 25% of its workforce since January 2025, including many enforcement employees.
• Agency leadership has been unstable, with seven commissioners or acting commissioners since January 1, 2025.
• The White House and congressional Republicans have proposed deep cuts to the IRS’s annual budget, particularly in enforcement.

The Bottom Line On Audit Risk

Most taxpayers can relax. In recent years, the IRS has audited well under 1% of individual tax returns, and that figure is expected to decline further. Most audits are conducted by mail, not in person, and many taxpayers never interact directly with an IRS agent.

That said, audits haven’t disappeared. Instead, the IRS is increasingly relying on correspondence audits, which are cheaper and require fewer staff. And while there’s no tax-enforcement free-for-all, your audit risk can rise significantly depending on your income, deductions, business activities, or foreign and digital assets.

Here are 15 common audit red flags to be aware of.

1. Failing To Report All Taxable Income

The IRS receives copies of your W-2s and 1099s and routinely matches them against your return. Any mismatch can trigger an automated notice and a tax bill. Report all income, even if you don’t receive a form. Side income from dog walking, tutoring, rideshare driving, music lessons, or selling crafts online is taxable. If a 1099 reports incorrect income, request a corrected form from the issuer.

2. Earning A Very High Income

Audit rates rise sharply as income increases, especially for taxpayers with business income. Higher income means more scrutiny.

• About 0.4% of all individual returns are audited
• 1% for income between $1 million and $5 million
• 2.3% for income between $5 million and $10 million
• Roughly 8% for income over $10 million

3. Not Filing A Required Tax Return

High-income non-filers are a major enforcement priority. The IRS focuses on individuals earning over $100,000 who fail to file returns. Persistent noncompliance can lead to liens, levies, or even criminal charges.

4. Claiming Unusually Large Deductions, Losses, Or Credits

Deductions or losses that are disproportionately large relative to your income can draw attention. This includes sizable investment losses, bad debt deductions, or worthless stock claims. If the deduction is legitimate and well-documented, claim it—but be prepared to substantiate it.

5. Claiming Refundable Tax Credits

Refundable credits are a frequent source of errors and abuse, making them a favorite target for correspondence audits. These include:

Premium Tax Credit

Errors often occur when taxpayers fail to reconcile advance payments using Form 8962 or claim the credit despite being ineligible.

Earned Income Tax Credit (EITC)

Complex eligibility rules—especially those involving qualifying children—lead to frequent mistakes.

Refundable Child Tax Credit

Up to $1,700 per child may be refundable for eligible taxpayers. Income limits and dependency rules are closely monitored.

American Opportunity Tax Credit (AOTC)

Common problems include claiming the credit for more than four years, missing Form 1098-T, omitting the school’s ID number, or double-dipping with other education tax benefits.

6. Taking Large Charitable Deductions

Charitable deductions far above the norm for your income level raise red flags, especially for noncash donations without proper appraisals or Form 8283. Conservation and façade easement donations receive intense scrutiny, particularly syndicated arrangements Congress has targeted as abusive.

7. Running a Business (Schedule C Filers)

Self-employed taxpayers face higher audit risk, especially those with:

• Gross receipts over $100,000
• Cash-intensive businesses
• Large or recurring losses
• Significant deductions relative to income

Special Areas of Focus:

• • Vehicle expenses: Claiming 100% business use is highly suspect
  • Marijuana businesses: Most deductions are disallowed by law
  • R&D credits: The IRS is cracking down on inflated or fraudulent claims

8. Writing Off Hobby Losses

Repeated losses from activities that resemble hobbies—especially when offsetting other income—are prime audit targets. To deduct losses, you must operate in a businesslike manner with a genuine profit motive. Generally, showing profit in three of five years helps establish legitimacy.

9. Avoiding Self-Employment Tax On Professional Income

The IRS is auditing LLC members and limited partners in professional services who avoid self-employment tax despite actively participating in the business. Recent court rulings have favored the IRS in these cases.

10. Claiming Large Rental Real Estate Losses

Rental losses are usually passive, but exceptions apply for active participants and real estate professionals. The IRS closely examines claims by taxpayers with substantial non-real-estate income who assert professional status.

11. Taking Early Retirement Distributions

Early withdrawals from IRAs and 401(k)s before age 59½ typically trigger a 10% penalty unless an exception applies. Errors in claiming exceptions are common and frequently audited.

12. Gambling Winnings And Losses

All gambling winnings are taxable. Claiming large losses without reporting winnings—or deducting losses improperly—can attract IRS scrutiny. New rules beginning with 2026 returns further limit deductible losses.

13. Claiming the Foreign Earned Income Exclusion

Taxpayers working abroad may exclude up to $130,000 of foreign earned income for 2025, but strict residency and tax-home rules apply. The IRS closely reviews claims involving continued U.S. ties.

14. Digital Asset Transactions

The IRS is aggressively pursuing unreported cryptocurrency and digital asset activity. All taxpayers must disclose digital asset transactions on Form 1040, and dedicated IRS teams handle crypto audits.

15. Failing to Report Foreign Bank Accounts

Foreign accounts exceeding $10,000 in aggregate must be reported on FinCEN Form 114 (FBAR). Failure to comply can result in severe penalties. Some taxpayers must also file Form 8938 with their tax return.

 

Source: Kiplinger