Key takeaways:

• The IRS can review your past three tax returns in audits — and up to six years if major errors are found
• Audit odds are low, but the IRS uses automated programs to identify issues
• Common red flags include unreported income and excessive deductions
• High earners and digital currency users may face extra scrutiny
• Maintaining strong records and specifical documentation can help prevent issues

IRS audits are rare but possible, especially if your return has errors or unusual claims. The agency can review up to three years of filings — longer for major discrepancies — and uses data-matching tools to spot red flags. Careful documentation and being aware of triggers can be good defenses to help protect yourself.

Tax Day comes fast every year. So, when it’s time to begin preparing and filing your taxes, keep in mind that audits can happen. What’s more, your last three years tax returns can be subject to scrutiny as those returns fall under the statute of limitations timeline the IRS has to review or audit tax returns In general, the statute of limitations is three years from the due date or the filing date of the return, whichever is later.¹

What is an IRS audit?

An IRS audit is an official review by the Internal Revenue Service of a business or individual’s tax return, supporting documents, and other financial accounts and information to ensure the accuracy of the information reported on the return, including the amount of income reported.

The percentage of individual tax returns that are selected for an IRS audit is relatively small. From 2020-2023, less than 0.50% of individual returns were selected for audits — the lowest of any published audit rate since 1950.²

Top IRS audit triggers

But just because the odds of being audited are small doesn’t mean that it’s impossible for you to be audited by the IRS. As part of its efforts to prevent fraud, the IRS continues to increase their usage of automated programs to identify tax returns that they believe warrant further scrutiny.

To reduce the chances that your tax return is audited, you should be aware of certain things that tend to flag returns for further IRS review.

Here are 12 IRS audit triggers to be aware of:

1. Math errors and typos

The IRS has programs that check the math and calculations on tax returns. If your return “doesn’t add up,” it may be flagged for further review. Double check your Social Security number — and your math.

2. High income

Audit rates have decreased by two-thirds since 2010.³ However, in recent years, the IRS has indicated the agency is allocating more audit resources to higher-income, higher-complexity taxpayers.⁴

3. Unreported income

The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn’t reported on your return, could trigger further review. So, if you receive a 1099 that isn’t yours, or isn’t correct, don’t ignore it. Contact the issuer of that 1099 and ask them to report a corrected form to the IRS.

4. Excessive deductions

The IRS will compare your itemized deductions to the average total deductions for a given item claimed by other taxpayers who are in the same income range as you. A taxpayer whose deductions appear to exceed these averages may be further scrutinized by the IRS. Don’t hesitate to claim every deduction that you are entitled to — just make sure you have the proper documentation.

5. Schedule C filers

The IRS particularly watches businesses that operate primarily with cash — as well as those that are reporting a loss. They have lots of experience auditing self-employed taxpayers who underreport income or overstate expenses. Be sure your records support what you are reporting.

6. Claiming 100% business use of a vehicle

The IRS knows that it’s rare for someone to use a vehicle they own 100% of the time for business purposes. And, if you don’t have another personal vehicle registered in your name, it’s nearly impossible to report that the vehicle is exclusively used for business. Claiming 100% business use of a vehicle will potentially draw IRS attention. The higher percentage you are claiming, the more critical it is that you have detailed records.

7. Claiming a loss on a hobby

Writing off expenses for a business is fine, but you can’t portray your hobby as a business. For it to be a business, you must have a reasonable expectation to make a profit. While there is some nuance to the issue, one factor the IRS can use as a guideline is if you have reported a profit for three of every five years you operate the business.

In order to report your activity as a business, it must be run like a business with appropriate records and documentation. Otherwise, the IRS could require you to restate any business income/loss as a hobby income/loss, subject to hobby rules. For more information, refer to the IRS’s rules on hobbies.

8. Home office deduction

To claim the home office deduction, you must use a portion of your home “regularly and exclusively” for business. Make sure home office expenses are well-documented and supported.⁵

9. Deducting business meals, travel, and entertainment

Business travel expenses are another area that draws IRS attention because of past abuse.⁶ First, it’s probably obvious that you can’t deduct expenses for which your employer reimburses you. Second, you must keep careful records — not just a receipt, but also a record of who was in attendance and the specific business purpose.

10. Earned income tax credit (EITC)

Some EITC errors are unintentional, but the IRS scrutinizes EITC claims closely to prevent fraud. If you claim the EITC, make sure to document how you meet EITC rules so that you can provide this documentation to the IRS in the future, if needed.⁷

11. Dealing in cryptocurrency and other digital assets

There’s currently less government regulation over cryptocurrencies than regular currency, which opens the door to potential fraud opportunities.⁸ The IRS has created a compliance campaign that’s focused exclusively on cryptocurrency transactions and also beefed-up enforcement to address abuse of virtual currencies.

12. Taking early withdrawals from retirement accounts

These withdrawals must meet certain criteria in order to avoid taxation and penalties. Therefore, the IRS keeps an eye out for unreported early retirement account withdrawals that don’t meet the criteria and are therefore taxable.

Read more: Roth IRA withdrawal rules

How far back can the IRS audit?

In normal circumstances, the IRS is allowed by law to go back three years when auditing tax returns. However, if errors are detected in a return they can go back even further, though they usually don’t go back more than six years.⁹

The IRS has up to three years to assess additional taxes after conducting an audit, though they can request an extension to this. (You are not legally required to accept the extension.) And they have three years after the audit to issue a refund if one is due to you.

How long should you keep tax records?

Since the IRS is normally allowed to audit the past three years’ tax returns, you should keep all tax returns and records for at least three years. Some experts recommend keeping tax returns for up to six or seven years in case the IRS goes back further than three years when conducting an audit.

Keep in mind that if you fail to file a tax return, the IRS can conduct audits going back indefinitely.

What should you do if you’re audited?

So, what should you do if you receive a notice from the IRS that your tax return is being audited? The most important thing is to respond to all IRS requests promptly and in a friendly and cooperative manner.

It’s possible the audit can be handled by mail, and you won’t even have to meet the auditor face to face. This might be the situation, for example, if the IRS is simply requesting documentation to support claims on your return.

Depending on how complex the audit is and how much money is involved, you might want to consult with a tax professional. If an accountant prepared your tax return, you should probably get him or her involved in the audit.

The IRS has created a webpage with lots of practical information to help you prepare for an audit.¹⁰

The bottom line

Understanding the flags that can trigger an IRS audit is a good way to help you verify that your tax return deductions and claims are accurate and well-documented. Working with a credible tax professional, however, may be your best line of defense when it comes to IRS audits.

Not only will a good tax professional be able to help you file your taxes and ensure that these IRS audit triggers are all by the books, but they will also be able to provide detailed documentation and information on your behalf if you should get audited.