8 Red Flags That Trigger IRS Audits in 2025

Your chances of being selected for an IRS audit are relatively low. For tax years 2013 to 2021, the federal tax agency examined just 0.44% of individual returns and 0.74% of corporate returns.

However, there are some audit triggers that could increase your odds of being audited. Understanding these IRS red flags can help you avoid common mistakes. Above all, it’s important to report honestly and maintain accurate records, as a lot of what triggers audits is rooted in discrepancies between what you report and what third parties report to the IRS. Here’s what you need to know.

Table of Contents

1. 🚩 1. Underreporting or omitting income
2. 🚩 2. Claiming excessive or unusual deductions
3. 🚩 3. Major changes in business income or expenses
4. 🚩 4. Cryptocurrency transactions and digital payments
5. 🚩 5. Failing to report foreign assets and income
6. 🚩 6. Excessive or repeated business losses
7. 🚩 7. Large refund claims or inaccurate credits
8. 🚩 8. Discrepancies with third-party reporting

🚩 1. Underreporting or omitting income

When you submit your tax return, the IRS’s computer system compares the income you report to your W-2 and 1099 forms. If it finds a discrepancy, a tax examiner will review your return, including your income, credits, and deductions, and it may propose an adjustment. 

To avoid this possibility, triple-check your work to verify that you’re reporting accurately.  

For business owners, the federal tax agency pays special attention to cash-intensive businesses, such as restaurants, beauty salons, car washes, and bars. Because cash transactions don’t involve third-party reporting, the IRS may require you to provide receipts to verify that you’re reporting your income accurately. 

🚩 2. Claiming excessive or unusual deductions

If you’re a small business owner, your expenses can help reduce your taxable income. However, the IRS may target you if it notices excessive or unusual deductions, especially if they’re disproportionate to your income.

The federal agency may pay special attention to the following:

• Home-office deductions: If you operate your business from your home, you may be able to deduct certain expenses, such as internet, phone, rent space, utilities, and repairs. However, if you claim too much of your home as an office, it could set off warning signals.
  
• Meal expenses: The IRS has strict rules about what constitutes a deductible meal expense. However, if your expenses exceed the norm for your business type, it could be a red flag.
  
• Travel costs: The IRS compares your travel expenses to the typical expenses for your business type. If you declare 20% more than the average, it could trigger an audit. 

• Vehicle-related expenses: Most business owners don’t use a vehicle strictly for business purposes. So, if you claim 100% of vehicle expenses as a business expense, it could be an IRS red flag. It’s also important to declare a specific purpose for take-home vehicles.

For individual tax returns, disproportionately large deductions for charitable contributions based on your income level could raise eyebrows. That said, if you are actually that charitable and have documentation to prove it, you won’t have to worry.

🚩 3. Major changes in business income or expenses

As a business owner, you may naturally experience fluctuations in your income and expenses. However, if the IRS notices major swings from one year to the next in its database, it may want to take an extra look.

In particular, the federal agency may focus on massive drops in income or spikes in deducted expenses. It’ll also pay attention to disproportionately high travel, meals, and other expenses listed above.

In the event that you do get audited, it’s important that you accurately track your income and expenses and hold onto receipts. Remember: deductible business expenses must be both ordinary and necessary. If you deduct costs that aren’t common to your industry nor appropriate to your trade, it could spell trouble.

🚩 4. Cryptocurrency transactions and digital payments

Because digital currency transactions are decentralized and anonymous, there’s a greater potential for unreported and underreported income from the sale of those assets. As a result, there’s heightened scrutiny for taxpayers who use cryptocurrencies.

Currently, the IRS compares digital asset income you report to the 1099-K forms it requires payment platforms like Coinbase and PayPal to provide. Starting with the 2025 tax year, however, the federal agency will require all brokers dealing with digital assets to file a 1099-DA form. The new form will provide more accurate reporting for gross proceeds involved in the sale or exchange of crypto assets.

If you run a business that accepts payments through digital platforms like PayPal, Venmo, or Cash App, you’ll need to report that income. For the 2024 tax year, the IRS requires those platforms to provide a 1099-K if you received $5,000 or more in payments for goods and services. However, that threshold drops to $2,500 for 2025 and $600 in 2026 and beyond.

To protect yourself, maintain a record of your crypto transactions and be sure to keep your personal and business transactions separate.

🚩 5. Failing to report foreign assets and income

The IRS requires you to report foreign assets worth at least $50,000, including the institution where the funds are held and the highest dollar amount the account was at the previous year. To check your work, the Foreign Account Tax Compliance Act requires international banks to identify American asset holders and provide details to the IRS.

You’re already at an increased chance of being audited for holding foreign assets. However, if you don’t comply, you may face severe penalties, including a fine and five years in prison.

You’re also required to report all income you earned throughout the year, including from foreign sources. To minimize the impact of double taxation, the agency allows certain taxpayers to exclude a certain amount from their taxable income. To avoid potential complications, it’s crucial that you report all overseas income.

🚩 6. Excessive or repeated business losses

If you own a small business, it can be a major red flag if you report big losses year after year. While that’s normal early on in the business life cycle—and typically won’t trigger an audit—you may be on the agency’s radar if you continue to post losses in the long term.

It’s also important to note that if you earn income from a hobby, you must report it. However, you can’t deduct expenses you incur from the hobby because the intent isn’t to earn a profit. 

Some of the factors the IRS considers to determine whether it’s a hobby or a business include:

• Whether you maintain complete and accurate financial records.
• How much time and effort you put into it to show you intend to profit.
• How much you depend on the income earned for your livelihood compared to other income sources.
• Whether the activity earns a profit and how much.
• Your expectation of future profits.
• Your personal motives — for example, profit versus general enjoyment.

🚩 7. Large refund claims or inaccurate credits

In addition to deductions, the IRS will also take a look at the credits you claim on your return. That includes popular credits like the following:

• Child tax credit: You may need to provide Social Security numbers for each qualifying dependent, along with documentation proving their citizenship and your relationship. If you’re divorced, separated, or living apart, you can’t claim a child if you’re a non-custodial parent unless you have documentation showing you can.
  
• Earned income credit: You may receive this if you’re a low- to moderate-income worker, and the amount you receive may depend on your dependents and other criteria. However, the claim may be denied if your child doesn’t qualify, someone else claimed the child, or you’ve underreported income, among others.
  
• Education credits: If you’re paying eligible educational expenses, you may qualify for the American Opportunity Credit or the Lifetime Learning Credit. However, you must provide evidence of your expenses and that the educational institution is eligible.

If you have a sizable refund due to your credits, it could lead to an audit.

🚩 8. Discrepancies with third-party reporting

As previously mentioned, the IRS will compare the income that you report to documentation it receives from other sources, such as employers, brokers, payment platforms, and other financial institutions. 

As a result, it’s crucial that you wait until you’ve received all income forms before you file your return. This is especially important for freelancers and contractors who may receive multiple 1099s from different clients. 

I recommend keeping organized electronic records so you’re always prepared for an audit. Be sure to keep copies of supporting documentation each year like tax reports and receipts for any deductible expenses. If you have a business, document the business purpose for each expense so you can prove it’s ordinary and necessary. 

The bottom line

While the chances of an IRS audit are typically low, there are some things that can increase your odds of scrutiny by the federal tax agency. 

To minimize the possibility, pay attention to audit red flags and take steps to avoid them. However, if you are audited, it’s important to stay calm and cooperate. Depending on the extent of the problem, you may simply need to amend your tax return and pay additional tax plus interest and applicable penalties.

In more complex cases with back taxes, it may make sense to enlist the help of a tax professional, such as a tax relief firm or attorney. Here are our recommendations for the best tax relief companies.