Common IRS Red Flags and How to Avoid an Audit

Few things cause more anxiety for taxpayers than the possibility of an IRS audit. While most returns are processed without issue, certain patterns and entries can trigger extra scrutiny from the Internal Revenue Service.

At Luna CPA, LLC, we help clients in Laredo, TX file accurate, compliant returns — and we know the warning signs that raise red flags. Understanding these triggers can help you minimize your audit risk and stay on the IRS's good side.

1. Reporting Unusually High Income or Sudden Spikes
   IRS data analytics automatically flag returns that differ significantly from the norm. A sudden increase in income, especially when not consistent with prior filings or industry averages, can draw attention.
   
   If you've had a legitimate income boost — such as business expansion or asset sales — keep clear documentation and work with a CPA to ensure your reporting aligns with IRS expectations.
   
2. Excessive Business Deductions
   Claiming business expenses far above your reported income is a common audit trigger. While deductions are legitimate, they must be ordinary and necessary to your business.
   
   Common red-flag areas include:

• Large travel or meal deductions
• Home office deductions without clear documentation
• Excessive vehicle or mileage claims
  
  At Luna CPA, LLC, we help business owners in Laredo properly document deductions to ensure every claim holds up under scrutiny.
  

3. Cash-Intensive Businesses
   Businesses that deal heavily in cash — such as restaurants, salons, and small retailers — face higher audit rates because of the potential for underreporting income.
   
   If your business operates largely in cash, keeping detailed daily records of receipts and deposits is critical. Using a professional bookkeeping system and CPA oversight helps ensure consistency and credibility in your reporting.
   
4. Large Charitable Contributions
   The IRS expects charitable donations to be proportionate to income. Claiming large deductions compared to your earnings can raise suspicion, especially without supporting documentation.
   
   Always retain:

• Receipts or acknowledgment letters from charities
• Appraisals for non-cash donations over $5,000
• Proof of payment (check or bank record)
  
  A CPA can verify that your deductions are legitimate and reported correctly under IRS guidelines.
  

5. Home Office Deductions
   The home office deduction is completely legitimate — but often abused. To qualify, your workspace must be used exclusively and regularly for business.
   
   You can deduct a portion of rent, utilities, and related expenses, but only if the area is strictly dedicated to business use. Improperly claiming personal spaces can result in IRS adjustments or penalties.
   
6. Round Numbers and Estimations
   Returns with rounded numbers (like $10,000 exactly) instead of exact figures can appear suspicious. The IRS's automated systems are designed to detect patterns of estimation, especially on business returns.
   
   Using accounting software or professional bookkeeping ensures your figures are accurate and defensible.
   
7. Failure to Report All Income
   Every W-2, 1099, and income source reported to the IRS must be included in your return. The IRS's matching system automatically compares what you report against what your employers and clients report.
   
   Missing even one 1099 form can trigger a notice or audit. A CPA can help you confirm that all income statements are accounted for before filing.
   
8. Claiming 100% Business Use of a Vehicle
   If you claim a vehicle is used 100% for business, the IRS expects strong evidence — such as a mileage log, trip records, or separate vehicles for personal use. Without proof, they may disallow the deduction and assess penalties.
   
9. Self-Employed Individuals and Schedule C Filers
   Self-employed taxpayers are more likely to be audited, especially those with high income or large expense deductions relative to earnings.
   
   A CPA ensures your Schedule C (Profit or Loss from Business) is accurate, well-documented, and structured to withstand IRS review.
   
10. Claiming Dependents Incorrectly
    Claiming dependents who also appear on someone else's tax return — like divorced parents or relatives sharing care responsibilities — is another common audit trigger. Clear documentation of support, residency, and legal custody helps resolve such issues before they escalate.
    
    How to Avoid an Audit
    The best way to prevent an audit is to file accurately and document thoroughly. Here's how to minimize your risk:

• Work with a Certified Public Accountant who reviews your return before filing.
• Maintain organized records year-round.
• Avoid exaggerating deductions or estimates.
• Respond promptly and professionally to any IRS notices.
  
  At Luna CPA, LLC, we review every client's return for compliance and accuracy, helping ensure that what's filed is both correct and defensible.
  
  Final Thoughts
  While no one can guarantee immunity from an IRS audit, working with a CPA significantly reduces your risk. CPAs understand what the IRS looks for, how to structure your records, and how to protect you if questions arise.
  
  If you receive an IRS notice or simply want to file with confidence this year, Luna CPA, LLC in Laredo, TX is here to help.
  
  Luna CPA, LLC
  Certified Public Accountants in Laredo, Texas — providing expert tax filing, audit defense, and peace of mind.