Why Would the IRS Perform an Audit on an Individual?
Aug. 5, 2025
Whether due to discrepancies, red flags, or statistical patterns, the IRS applies several criteria when choosing returns for audit. Understanding these can help individuals be more prepared and avoid unnecessary scrutiny. Tax compliance remains a crucial concern for every filer, especially those with nuanced income or deductions.
The Law Office of Scott N Tisevich, Esq understands that receiving a notice of audit from the Internal Revenue Service can feel overwhelming. Many of our clients in Reno, Nevada, ask what triggered the IRS to select their return for further examination. The truth is, while some tax audits are random, most are initiated for specific reasons.
How IRS Audits Are Selected
Tax audits don’t occur by chance alone. While random selection does occur, the IRS relies on multiple systems and criteria to decide which tax returns warrant closer examination.
Discriminant Information Function (DIF) Scoring
One of the most common triggers of an audit is a return that scores unusually high on the IRS’s Discriminant Information Function (DIF) system. This program evaluates tax returns based on historical data to determine if reported income and deductions are outside expected norms.
Unusually large deductions: A taxpayer claiming deductions that are significantly higher than others in their income bracket may raise suspicion.
Mismatch between income and lifestyle: Someone reporting modest income but displaying wealth through assets or spending may receive IRS attention.
Inconsistent filing patterns: Drastic year-to-year changes without clear explanations often prompt scrutiny.
These red flags can increase the chances of an IRS audit, making it essential to file accurate, consistent, and well-documented returns each year.
Random Selection and Statistical Flags
Some audits are the result of purely statistical selection. However, these are influenced by the IRS’s current areas of concern or national audit initiatives.
High audit probability industries: Self-employed taxpayers and those in cash-intensive businesses are more frequently audited.
IRS national research programs: These aim to improve tax compliance by examining taxpayer behavior in certain income groups or professions.
While some audits arise from random selection, others are driven by targeted IRS priorities, making certain industries and income profiles more susceptible to scrutiny.
Third-Party Document Matching
The IRS receives copies of financial records from third parties like employers, banks, and investment firms. Discrepancies between reported income and these documents often lead to audit.
Missing W-2s or 1099s: Forgetting to report all income forms triggers automatic notices.
Interest and dividend reporting errors: Banks and brokers report payments that must be reflected on a return.
Mismatch in stock sale proceeds: Capital gains not matching brokerage reports can lead to further questions.
When your return doesn’t align with third-party reports, it raises immediate red flags—making accurate and complete income reporting essential to avoid audit risk.
Common Red Flags That Attract IRS Attention
Some taxpayers are more likely to be audited simply because of certain patterns or entries in their tax returns. These red flags often signal to the IRS that a return deserves closer inspection.
Excessive Itemized Deductions
While deductions are allowed, going far above average can raise concerns.
Charitable contributions beyond expected limits: Consistently high donations in proportion to income often prompt verification.
Home office deductions: These are legitimate only when used exclusively for business and often scrutinized.
Medical expenses: Deductions must exceed a certain percentage of income and be properly documented.
Excessive or improperly documented deductions may draw IRS attention, so it’s crucial to claim only what’s reasonable and supported by clear records.
Unreported Income
Failing to report all sources of income is one of the quickest ways to receive a notice from the IRS.
Cash income: Restaurant workers, handymen, and others in cash-reliant industries often fall under this category.
Side jobs and gig work: Platforms like Uber, Airbnb, and Etsy issue 1099s that the IRS matches.
Gambling winnings: Casinos and other gaming organizations report large wins directly to the IRS.
Omitting any source of income—especially those reported by third parties—can significantly increase your chances of being audited.
Self-Employment or Freelance Income
Taxpayers who work for themselves must be meticulous in their records. The IRS closely examines returns from self-employed individuals due to the potential for unreported income or improper deductions.
Overstated expenses: Attempting to reduce taxable income by inflating costs is a common mistake.
Failure to pay self-employment tax: This is often overlooked but legally required.
No 1099s on file: When no third-party records are submitted but income is claimed, the IRS may investigate further.
Because self-employment income lacks third-party verification, detailed records and honest reporting are critical to avoiding unwanted IRS attention.
Types of IRS Audits an Individual May Face
If your tax return is selected for review, the IRS will initiate one of several types of audits depending on the issue at hand. Understanding what to expect can help individuals better prepare for the process.
Correspondence Audit
This is the most common type of IRS audit and involves the agency requesting additional documentation via mail.
Usually triggered by minor issues: These include mathematical errors or missing forms.
Can be resolved by mailing documents: No in-person meeting is typically required.
Strict deadlines apply: Failing to respond promptly can escalate the issue.
Though typically less intrusive, correspondence audits still demand timely and accurate responses to prevent further IRS action.
Office Audit
These audits occur at a local IRS office and involve more nuanced issues.
Used for verifying deductions: Common for business expenses, rental property income, and charitable contributions.
Requires in-person meeting: You or your tax lawyer must bring specific records.
Advance preparation is essential: Organize receipts, invoices, and bank statements.
Office audits require thorough preparation and in-person documentation, making it vital to approach them with organized records and professional guidance.
Field Audit
This is the most extensive type of audit, where an IRS agent visits your home or business.
Usually for high-income taxpayers or businesses: Field audits focus on extensive records and interview-based verification.
May involve multiple tax years: The IRS could expand the audit depending on what is uncovered.
Legal representation is strongly advised: A tax lawyer can help protect your rights and avoid unnecessary disclosures.
Field audits are comprehensive and high-stakes, so having legal representation and well-prepared records is essential to protect your interests.
IRS Focus Areas That Often Lead to Audits
The IRS publicly shares its areas of focus from time to time. Certain income sources or deductions receive closer scrutiny because they are more likely to be misreported.
Cryptocurrency Transactions
The IRS has significantly increased its scrutiny of digital currency transactions.
Unreported capital gains: Selling cryptocurrency for profit triggers taxable events.
Failure to disclose holdings: Taxpayers must report cryptocurrency even if not sold during the year.
Use in business: Accepting crypto as payment also requires accurate recordkeeping.
With the IRS ramping up enforcement around digital assets, properly reporting cryptocurrency activity is now more important than ever.
Real Estate Transactions
Large capital gains or rental income errors can also trigger an audit.
Failure to report sales: Even if a home sale qualifies for the exclusion, it must still be reported.
Unsubstantiated rental losses: Passive activity loss rules restrict deductions in many situations.
Misuse of depreciation: Claiming depreciation for personal use property is not permitted.
Mistakes or omissions involving capital gains and rental income often raise red flags, so accurate reporting and proper documentation are key.
Foreign Accounts and Income
Taxpayers with offshore assets or income must follow strict reporting rules.
Failure to file FBAR: The Foreign Bank Account Report is required for foreign accounts over a certain value.
Non-compliance with FATCA: The Foreign Account Tax Compliance Act also imposes reporting duties.
Underreporting foreign income: This includes wages, interest, dividends, and rental income earned abroad.
Failing to comply with foreign income and asset reporting rules can lead to serious penalties, making full disclosure essential for taxpayers with offshore interests.
How to Lower the Risk of an Audit
Although no strategy can eliminate all audit risk, certain actions can reduce the chances of attracting unwanted IRS attention.
File accurate and complete returns: Avoid simple errors and always double-check math and details.
Use professional tax preparation services: A lawyer or certified tax preparer can help verify entries and supporting documents.
Keep meticulous records: Maintain receipts, statements, and tax forms for at least seven years.
Report all income sources: Even small side jobs or interest payments must be declared.
Don’t exaggerate deductions or credits: Only claim what can be supported by documentation.
By following best practices and staying transparent, taxpayers can significantly lower their audit risk and approach each filing season with greater confidence.
What To Do If You Receive an IRS Audit Notice
Receiving an audit letter does not mean wrongdoing, but it does require careful attention and prompt action.
Steps You Should Take Immediately
Read the notice carefully: It will explain what tax year is being examined and what documents are needed.
Check deadlines: IRS audit letters have strict response timelines.
Gather relevant documents: This includes receipts, bank statements, and forms mentioned in the notice.
Don’t alter records: Modifying or fabricating records can result in legal penalties.
Responding to an audit letter with honesty, organization, and timeliness is the best way to address IRS concerns and protect your financial standing.
When to Contact a Tax Lawyer
Many individuals benefit from having legal representation during the audit process, especially when significant amounts of money or legal interpretations are involved.
When the IRS requests an in-person meeting: Field or office audits often go smoother with legal guidance.
If you believe the audit is incorrect or unfair: A lawyer can help present your position and request review.
To protect against self-incrimination: In certain situations, criminal tax fraud may be alleged, and a lawyer can safeguard your rights.
When audits involve complicated issues or high stakes, having legal representation offers crucial protection and increases the chances of a favorable resolution.
Contact a Tax Lawyer Today
With the help of the Law Office of Scott N Tisevich, Esq, you can approach the process with confidence and clarity. Whether your situation involves self-employment, real estate, digital assets, or foreign income, the firm can help prepare you, represent your interests, and respond to the IRS appropriately. They serve clients throughout Reno, Nevada; Churchill County; Lyon County; Carson City; Story County; Douglas County; and Las Vegas, Nevada. Get in touch today.