What really triggers an IRS audit — and what doesn't

Few letters cause more anxiety than one from the IRS that mentions an examination. The good news is that the overall chance of a full audit is small, and most exams are narrow, handled by mail and resolved with documents. The better news is that you can control most of the factors that invite one.

How returns actually get picked

The IRS uses a few main methods to select returns:

• Information matching. Employers, clients, banks, brokers and payment platforms send the IRS copies of your W-2s, 1099s and 1099-Ks. A computer compares those totals to your return. If a form reports income you didn't include, you'll likely get a notice — often a CP2000 — automatically.
• Statistical scoring. Returns are scored against norms for similar filers. Numbers far outside the typical range for your income and industry are more likely to be reviewed by a person.
• Related examinations. If a business partner, client or entity you're involved with is audited, your return can be pulled in.
• Specific compliance initiatives. The IRS periodically focuses on particular issues, industries or income levels.

Real red flags

Unreported income

This is the big one. Leaving off a 1099, a brokerage sale or payment-app income is the most reliable way to get a letter, because the IRS already has the other side of the transaction.

Large or recurring business losses

A Schedule C that shows a loss year after year — especially alongside high W-2 income — invites the question of whether the activity is really a business or a hobby. Hobby expenses aren't deductible.

Deductions out of proportion to income

$40,000 of meals and travel against $60,000 of revenue will stand out. It may all be legitimate, but it needs to be documented to the dollar.

100% business use of a vehicle

Claiming that a vehicle was never used personally is possible but rare, and it draws scrutiny. A contemporaneous mileage log is what makes it hold up.

Very low S-corp salaries

Paying yourself little or no salary while taking large distributions is a known IRS focus area. See how to set a reasonable salary.

Cash-heavy businesses and round numbers

Businesses that take a lot of cash receive more attention, and expense lines that are all suspiciously round suggest estimates rather than records.

Large non-cash charitable gifts

Donating property worth more than $5,000 generally requires a qualified appraisal and Form 8283. Missing paperwork is an easy disallowance.

Myths worth dropping

• "The home office deduction is an audit magnet." It's a legitimate deduction used by millions of people. What matters is that the space genuinely qualifies. See the home office deduction without the myths.
• "Filing an extension raises your audit risk." There's no evidence of that. An extension gives you time to file accurately, which lowers risk.
• "Amending a return triggers an audit." Fixing an error is the right thing to do and generally beats having the IRS find it first.
• "Using a preparer makes you audit-proof." You're responsible for what's on your return no matter who prepared it.

Lowering your risk

1. Reconcile every information return to your books before filing. If a 1099 is wrong, ask the payer to correct it and document the difference.
2. Keep business and personal money separate. A dedicated bank account and card make your records believable.
3. Record expenses when they happen, with the business purpose. Reconstructing a year of receipts from memory is where audits go badly.
4. Explain the unusual. A one-time spike in expenses is fine; a short explanation in your workpapers is better than hoping nobody asks.
5. Keep your records for at least as long as the IRS can look back. Our guide to record retention covers the timelines.

None of this means skipping deductions you're entitled to. It means taking them with the paperwork already in place — so if a letter ever comes, the answer is a folder, not a scramble.