Avoiding Tax Audits: 10 Tips on How to Avoid an IRS Audit

avoiding an IRS audit

Any tax return may be randomly selected for an audit, but more commonly, the IRS flags returns that show noticeable mistakes or indicators of inaccuracy. If you want to minimize the risk of being selected for an audit, you need to be aware of the red flags and file accordingly. Unfortunately, there's nothing you can do to avoid being randomly selected for an audit, but there's a lot you can do to avoid being flagged by the IRS's audit computers. Keep these 10 tips in mind:

Key takeaways

To reduce your risk of an audit, file an accurate return.
Choose the right filing status.
Report all income, including cash.
Only claim legitimate deductions -- make sure you understand the rules for home office, travel, meal expenses, and Section 179 deductions in particular.
If claiming unusual deductions, make sure to have detailed documentation to back up your claims.
Watch out for the hobby-loss rules.
Avoid illegal tax shelters
Work with a CPA to protect yourself.

1. File an accurate tax return

Filing an accurate return will help you to get through an audit with as few hurdles as possible, but it will also help to ensure that your return doesn't get flagged by the IRS's computers for errors. The IRS uses three different computer systems to look for inaccuracies:

Discriminant Function System (DIF) -- Uses a secret IRS formula to rank returns for the potential for error.
Unreported Income Discriminant Function System (UIDIF) -- Ranks returns for the potential of having unreported income.
Information Returns Processing System (IDF) -- Compares the information you reported to the information provided by third parties to see if everything matches up.

If one of these systems finds an issue with your return, the IRS may send you an audit notice and start the audit process. Sometimes, however, the agency may just adjust your tax return -- for instance, if the IRS determines that you underreported income through the Automated Underreporter (AUR) system, they may adjust your return and send a CP2000 notice. As you keep reading, you'll see that a lot of the tips about how to avoid getting audited fall under the umbrella of filing an accurate return.

2. Use the correct filing status

If the IRS sees that you've selected an incorrect filing status, they may assess penalties against you, and they also could decide to audit your return. If you incorrectly claim head of household status, they could potentially ban you from using this filing status in the future. The filing status rules are very clear, but they're also fairly complicated. If you're not sure, consult with a tax professional.

If you're unmarried, you can file as follows:

Single -- Default status for unmarried taxpayers.
Head of household -- Available to single filers who have a qualifying dependent.
Qualifying widow(er) -- Available to widowed taxpayers, the first two years after their spouse passes away, but only if they have a qualifying dependent and have not remarried.
Married filing separately or jointly -- The only way you can claim one of these filing statuses if you are unmarried is if your spouse died at some point during the tax year. For example, if you are unmarried (widowed) on December 31, 2025, and your spouse died on March 15, 2025 (or any other date during 2025), you can file your 2025 tax return as married filing jointly or married filing separately. In this case, you may also be able to file as single.

If you're married on the last day of the tax year, you should use one of these filing statuses:

Married filing jointly -- You can only use MFJ if your spouse agrees.
Married filing separately -- If either spouse wants to use this option, you must both use this option.
Head of household -- if you have lived apart for at least six months and you keep up the care of a qualifying dependent.

This rule also applies if you're common-law married based on the laws in your state. If you are legally separated, the IRS doesn't consider you to be married. In contrast, if you live apart but are not legally separated, you are generally still considered to be married. If you're married to a non-resident alien spouse, you may be able to claim head of household, even if you live together -- note the filing rules for non-resident and dual-status aliens can be complicated.

Do married filing separately returns have a higher audit rate?

The IRS doesn't publish audit rates based on filing status. But many tax pros believe that filing separately when you're married increases your audit risk because the IRS tends to scrutinize these returns. There are a lot of rules specific to married-filing-separately returns that make them more prone to errors and thus more likely to be audited. When you file separately, you put your spouse's Social Security Number on the return -- that allows the IRS to ensure that they have claimed the correct filing status on their return, which should also be MFS or head of household in rare situations -- errors may increase audit risks for both filers. Look at the differences between filing MFJ vs. MFS.

3. Avoid round numbers

Your return should use accurate numbers and not estimates. If you file a return with all rounded numbers, the IRS will see that as a red flag that your return is probably incorrect. For example, imagine that you're a business taxpayer and you report the following: $200,000 in revenue, $60,000 in cost of goods sold, $30,000 in contract labor, $10,000 in supplies, $10,000 in office expenses, and $5,000 in utilities. It's very unlikely that a business would have revenue and expenses that all come out to rounded numbers -- and by filing a return like that, you increase your audit risk significantly. Check out audit survival tips.

4. Don't forget to report cash income

The IRS and the state revenue agencies both pay special attention to businesses that traditionally have a lot of cash revenue, and your return may be flagged for an audit if you don't report cash payments. To illustrate, think of a restaurant that has $1 million in sales. Approximately $750,000 in sales are paid by credit card, and the restaurant's payment processing company issues a 1099-K that shows $750,000 in income. The remaining $250,000 is cash sales. When the restaurant files its tax return, it only reports the $750,000 shown on the 1099-K as income.

However, the IRS knows that it would be very unlikely for the restaurant not to receive any cash payments during the year, so the IRS flags the return for an audit because the only revenue reported is on a 1099. In this case, the agency knows that most restaurants report their 1099-K income plus additional income related to cash sales.

5. Only claim legitimate deductions

The IRS allows businesses to deduct expenses that are ordinary and necessary in their line of business. Additionally, individuals who itemize rather than claim the standard deduction can claim a variety of deductions, including healthcare expenses over a certain threshold, state and local taxes, and charitable contributions. In both cases, you should only claim legitimate deductions. The IRS's automated systems will pick up on personal or business deductions that don't make sense.

For example, say your income is $20,000 but you claim $15,000 in charitable deductions; the IRS may give your return a second look because it's unlikely (but not impossible) that someone with that level of income can give away that much money. Or consider someone who runs an online boutique and then claims deductions for two new cars and extensive mileage -- in that situation, the IRS may notice that the vehicle expenses seem high for a business that deals with customers online and doesn't need to drive to the bank to deposit cash.

However, in some cases, you may have legitimate deductions that seem odd on paper -- and in those situations, you may not be able to minimize your audit risk. To protect yourself, make sure you keep accurate documents and receipts so that if you are selected for an audit, you can easily back up the claims on your return and get through the audit without facing a tax assessment or any audit penalties.

Does claiming a home office increase my audit risk?

Contrary to popular belief, claiming a home office deduction does not increase your audit risk, as long as you claim the deduction correctly. Self-employed workers can claim the home office deduction on Schedule C -- you can either claim the simplified deduction of $5 per square foot up to $1500 or a percentage of home expenses (rent, mortgage interest, depreciation, utilities, etc) based on the size of your office relative to your home. Although Schedule F (farming) does not have a line for a home office deduction, you can claim the deduction on the miscellaneous expenses line.

Wage earners (anyone who receives a W2) are not allowed to claim a home office deduction -- if your only income is on a W2 but you file a Schedule C to claim a home office deduction, that is not correct, and the IRS will notice the issue and may flag you for an audit. Finally, S-corporations and C-corps cannot claim a home office deduction, but the corporation may be able to rent an office from you in your home. Then, you'll generally report the rent as income and claim expenses accordingly (typically on a Schedule E).

If you believe that you have a legitimate home office deduction (use the space exclusively and regularly for work), you shouldn't worry about a heightened audit risk, but you should be able to back up your claim if you claim the deduction. For example, note which activities happen in that space, consider having photos of it, and if you meet with clients, keep a log. Note that some CPAs recommend not to claim the home office deduction -- if you qualify based on the IRS's rules, that advice is overly cautious.

Do Section 179 deductions increase my audit risk?

Section 179 deductions do not necessarily increase your audit risk, but they can have a significant effect on income, and with very small businesses, these deductions can even wipe out all of the business's profits and/or potentially reduce your income to the point that you may receive an Earned Income Tax Credit (EITC). Businesses that claim repeated losses and returns with EITCs are both subject to slightly higher audit rates -- so that may indirectly increase your risk of an audit. Again, you just need to be able to back up the claim and prove that the asset was purchased for business use.

6. Complete the return thoroughly

Make sure you complete the return completely. Forgetting to fill in a line here or there can lead to mistakes and incorrect tax calculations. Depending on how the return was completed, the IRS may adjust the errors or initiate an audit. Note that failure to sign your return actually increases the amount of time the agency can take to audit your return -- usually, they have three years, but if you don't sign, there's no time limit.

7. Avoid Illegal Tax Shelters

Some tax shelters are completely legal -- for example, reducing your taxable income by contributing to a tax-advantaged retirement account. However, there are many illegal tax shelters. The tax code is extremely complicated, so it can be hard for taxpayers to always understand the differences between legal tax avoidance and illegal tax evasion, but in many cases, if something seems too good to be true, it is. For example, in recent years, unscrupulous promoters have tricked taxpayers into claiming fraudulent fuel tax credits and employee retention credits (ERC). Another example is syndicated conservation easements.

8. Be Aware of the Hobby-Loss Rules

You are allowed to claim business losses -- and those losses can help to offset other business income and a certain amount of earned income. However, if you claim losses repeatedly every year, the IRS may flag your return and take a closer look at the situation to ensure you're on the right side of the hobby-loss rules. You're allowed to claim losses for a business but not for a hobby -- however, you must report income for both.

For example, say that you race cars. If it's a business, you must report all your income, but you can claim all your expenses (vehicle expenses, travel costs for going to races, entry fees, training costs, etc). As long as you're actively pursuing a profit, you can report a loss. However, if you report repeated losses, the IRS may claim that racing cars is just a hobby and that you are not entitled to claim losses. At that point, they'll reach out about an audit. You'll have to back up the income and expenses you reported, but you'll also have to prove that you're engaging in a business and not a hobby, which can get tricky.

9. Classify Workers Correctly

There are very strict rules that determine whether a worker is an independent contractor or an employee, and misclassification can lead to penalties, tax assessments, and potentially even legal issues. The IRS may spot issues on your payroll or business income tax returns that indicate you should have employees rather than contractors, and the agency may initiate an audit. For example, certain industries (for example, retail or hospitality) should have employees and not contractors, and if the agency sees that you're claiming contractor expenses instead of wage expenses, they may flag your return for an audit.

Also, keep in mind that you're dealing with other people. If a worker feels like they've been misclassified as a contractor, they may reach out to the IRS and let them know. Then, the agency may initiate an audit based on their complaint -- this is sometimes called a whistleblower audit, which refers to an audit started due to a complaint from a third party about the taxpayer.

10. Use a tax software program or tax professional to file

Using tax software or a tax professional can solve three of the most common reasons returns get audited. First being that it will ensure calculations are correct, second the return will be complete, and third, it will ensure it is legible. One of the most common reasons for tax returns to be audited is because there are math errors or they are incomplete. Using a tax filing program can ensure that the math is done properly and will ensure the return is complete before filing. If you decide to use a tax professional, that will ensure the accuracy of your filing as well -- if you have a complicated tax situation, you should almost always work with a pro rather than using software.

There's a lot that you can do to minimize your risk of being flagged for an audit, but you cannot eliminate the risk completely. That's why it's critical to keep detailed records about personal or business deductions and other tax matters. If you are selected for an audit, use TaxCure to help you find an audit attorney or another tax professional who can represent you through the process.

Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney.