Nobody wants to be audited. Understanding what draws IRS attention helps you prepare returns that are accurate and defensible.
The DIF Score
Every return gets scored by the IRS Discriminant Information Function, which compares the return to statistical norms for similar taxpayers. If a return deviates significantly from what the IRS expects for a given income level and filing type, the score goes up and the return is more likely to be flagged. You can’t see the DIF score, but common sense applies: a taxpayer earning $60,000 who claims $40,000 in Schedule C deductions will stand out.
Unreported Income
The IRS matches every W-2 and 1099 against the income reported on the return. A mismatch triggers a CP2000 notice and can lead to further examination. Always pull wage and income transcripts and verify that all reported income is on the return.
High Deductions Relative to Income
Large charitable contributions, excessive business expenses, and outsized home office deductions attract attention when they’re disproportionate to income. That doesn’t mean you shouldn’t claim legitimate deductions. It means they need to be real, documented, and defensible.
Round Numbers
If every deduction on the return ends in a zero ($5,000 for supplies, $3,000 for travel, $2,000 for meals), it signals the numbers were estimated rather than tracked from actual records. Use actual amounts.
Cash-Heavy Businesses
Restaurants, salons, vending operations, and other cash-intensive businesses get extra IRS scrutiny because cash income is easier to underreport. Make sure your client is reporting all of it.
EITC Returns
Returns claiming the Earned Income Tax Credit are audited at higher rates than average. Your due diligence under Section 6695(g) is your first line of defense.
Hobby Losses
A side business showing losses year after year may be reclassified as a hobby. If the activity doesn’t show a profit in at least three of the last five years, the IRS may disallow the losses.
Your Job
Prepare accurate, well-documented returns with realistic numbers. Don’t inflate deductions. Don’t omit income. Document your work so that if a return is questioned, you can explain every number.
For training on preparing audit-resistant returns, visit musespring.com.