Are You at Risk? 7 Common Audit Red Flags for the IRS

Posted on July 30th, 2025.

It’s a moment no taxpayer wants to face: a letter from the IRS announcing an audit. But how does the IRS decide who to audit? Contrary to popular belief, the IRS doesn’t audit taxpayers at random. In fact, it uses a complex system to identify returns that raise suspicion. If your tax return contains certain discrepancies or omissions, you might be flagged for further review. Understanding the red flags that catch the IRS's attention is crucial to lowering your audit risk.

In this article, we will break down seven common IRS audit triggers, explain why they matter, and show you how to avoid them. If you run a small business, freelance, or simply want to stay on the right side of tax law, knowing these red flags can help you file with confidence and avoid unnecessary headaches.

1. Reporting Inaccurate Income

One of the fastest ways to land on the IRS's radar is by reporting income that doesn’t match what your employer or clients report. Thanks to W-2s, 1099s, and third-party reporting systems, the IRS already knows what you earned. If your tax return doesn’t align with that data, expect follow-up questions.

What the IRS Looks For:

• Mismatches between your reported income and employer-issued forms

• Underreported self-employment income from gig work or freelancing

• Inconsistent income history from previous years

To stay audit-proof, compare your records with every document you receive and double-check before submitting your return. Use a tax professional if you have multiple income streams or complex filings. Accuracy isn't optional when it comes to IRS compliance.

2. Missing or Incomplete Documentation

Incomplete tax documentation is another red flag. Forgetting to attach a required form or failing to support deductions can look like negligence or, worse, fraud.

Common Culprits Include:

• Missing employee records like W-2s or 1099s

• No proof for charitable contributions or business expenses

• Failing to file additional required schedules or supporting forms

A good rule of thumb: if you’re claiming it, be ready to back it up. Keep all receipts, invoices, mileage logs, and bank statements organized. Consider using a digital filing system to make retrieval easier during tax season—or an audit.

3. Excessive Deductions

Legitimate deductions are part of smart tax planning. But if yours are significantly higher than average for your income level, the IRS may take a closer look.

Red Flags for Excessive Deductions:

• Business travel, meals, or home office expenses that seem inflated

• Charitable donations disproportionate to your income

• Unusually large Schedule C write-offs

Small business owners and the self-employed are particularly vulnerable to this trigger. Always keep documentation and consider consulting a tax professional to review large deductions before filing.

4. Filing Late or Not at All

Failing to file your taxes—or constantly filing late—can raise suspicion, even if you eventually pay what you owe.

Why This Raises Audit Risk:

• Late filers may be seen as avoiding taxes

• Unfiled returns can signal financial mismanagement or concealment

• Interest and penalties accumulate and make problems worse

To avoid being flagged, file on time every year. If you're unable to meet the deadline, request an extension and pay at least an estimated amount. Filing late is better than not filing at all, but repeated tardiness is risky.

5. Mixing Personal and Business Expenses

This is a common mistake among small business owners, freelancers, and entrepreneurs. Blurring the lines between personal and business costs is a major red flag.

Examples That May Trigger an Audit:

• Claiming vacations or family meals as business travel

• Listing a personal vehicle as 100% business use

• Writing off everyday purchases without proper justification

Keep separate bank accounts for business and personal finances. Always label receipts and maintain logs for business-related mileage and expenses. It not only helps in the event of an audit but also gives you a clearer financial picture.

6. Claiming the Earned Income Tax Credit (EITC) Incorrectly

The EITC is designed to support low- to moderate-income working individuals and families. However, it has one of the highest audit rates due to frequent errors and abuse.

Common Mistakes:

• Incorrectly claiming dependents

• Underreporting income to qualify for the credit

• Filing as head of household without meeting the criteria

Double-check eligibility requirements and document all information thoroughly. Mistakes on EITC claims can result in your refund being delayed or denied—and may lead to future audits.

7. Running a Primarily Cash-Based Business

If you operate in industries like hospitality, beauty services, construction, or event planning—where transactions are often made in cash—the IRS keeps a closer watch.

Red Flags for Cash-Heavy Businesses:

• High expenses reported without equivalent income

• No records for cash sales

• Unusual bank deposit patterns

Be meticulous about logging income, even when it’s received in cash. Consider implementing a digital POS system that creates a clear audit trail.

Preventing Mistakes That Trigger Audits

Avoiding an audit isn’t just about evading trouble—it’s about practicing transparency, accuracy, and responsibility in your financial life. To reduce your audit risk:

• Review your tax return carefully before filing

• Maintain detailed, organized financial records

• Avoid making large, unsupported claims

• File on time and pay what you owe

• Hire a qualified tax preparer if your return is complex

Simple steps like verifying your address, income, and deductions go a long way toward keeping your return clean. Even small errors can trigger scrutiny.

Why You Shouldn’t Go Through It Alone

Audits can be intimidating, even for honest taxpayers. The good news is that you don’t have to face them alone. Working with a financial expert can mean the difference between a minor inquiry and a stressful legal ordeal.

At Virtuous Financial Consultant, we offer dedicated audit representation services designed to protect you during IRS disputes. Whether you're currently being audited or want to ensure your filings are accurate and complete, our experts can step in with clarity and confidence.

Even small mistakes—like a mismatched address or missing employee form—can raise red flags you didn’t know existed. Before the IRS comes knocking, get a second set of expert eyes on your documents.

We’re here to offer proactive help, not just reactive support. That means identifying audit risks early, correcting documentation, and representing you with professionalism if an audit proceeds.

Don’t wait until it's too late. Contact Virtuous Financial Consultant today and let us help you protect your business, your income, and your peace of mind. Visit us online or call (251) 303-9192 to get started today.