How to Reduce Your IRS Audit Risk: Red Flags That Could Trigger One

How to Reduce Your IRS Audit Risk: Red Flags That Could Trigger One

No taxpayer or business owner wants to face an IRS audit. While audits aren’t common, certain mistakes and red flags can increase your chances of being selected. Here’s what could trigger an audit—and how to reduce your risk.

1. Failing to Report All Income

The IRS receives copies of all 1099s and W-2s issued to you. If you underreport income, even by mistake, it’s a major red flag that can lead to an audit.

✅ Tip: Always double-check your income sources before filing.

2. Claiming Too Many Deductions

While deductions help reduce tax liability, excessive or unrealistic deductions—especially for meals, travel, or home office expenses—can attract IRS scrutiny.

✅ Tip: Keep detailed records and receipts for every deduction you claim.

3. Large Charitable Donations

If your charitable contributions are significantly higher than what’s typical for your income level, the IRS may take a closer look.

✅ Tip: Keep proper documentation, including receipts and letters from charitable organizations.

4. Rounding Numbers Too Often

Using too many round numbers (e.g., reporting $5,000 instead of $5,127) can appear suspicious to the IRS.

✅ Tip: Always report exact amounts from your records.

5. Claiming 100% Business Use of a Vehicle

Unless you have a dedicated business vehicle with no personal use, claiming 100% business use is a common audit trigger.

✅ Tip: Keep a detailed mileage log and ensure your vehicle use is accurately documented. If your vehicle is used for both personal and business purposes, only deduct the percentage used for business.

6. Running a Cash-Intensive Business

Businesses that primarily deal in cash (e.g., restaurants, salons, or small retail) are more likely to be audited since cash transactions are harder to track.

✅ Tip: Keep meticulous records of sales, deposits, and receipts.

7. Home Office Deduction Errors

The IRS carefully scrutinizes home office deductions to ensure they meet strict requirements.

✅ Tip: Your home office must be exclusively used for business and be your primary place of work.

📘– Want to learn more? Read our complete guide on the home office deduction to maximize your tax savings.

8. Excessive Losses Year After Year

If you report a business loss several years in a row, the IRS may question whether your business is actually a hobby.

✅ Tip: Keep records of business activities, client communications, and efforts to generate revenue. If claiming losses over multiple years, ensure you can demonstrate that your business is run with the intent to make a profit.

9. High Income Levels

Statistically, higher earners (typically those making over $200,000 per year) have a greater chance of being audited.

✅ Tip: Keep organized records and consider professional tax assistance to ensure compliance.

10. Claiming Too Many Cash or Large Deductions

Large cash deductions, especially without supporting documentation, can raise suspicion.

✅ Tip: Use a business bank account and track expenses electronically to create a clear paper trail.

Final Thoughts

While no one can completely eliminate the risk of an audit, staying aware of these red flags and maintaining detailed records can greatly reduce your chances. If you need help preparing your taxes or ensuring your deductions are accurate, KB2 Bookkeeping & Tax is here to help! Contact us today to ensure you’re audit-ready.