7 IRS Audit Red Flags: Are You at Risk?

The IRS audit process is driven by the DIF (Discriminant Inventory Function) score. This automated scoring system compares your tax return against millions of others to find statistical anomalies. If your deductions are “too high” or your numbers are “too round,” your score spikes. Here is how to avoid the 7 common triggers and how long the risk lasts.

BMT Tax Team BMT Tax Team · 📅 Jan 2026 · ⏱️ 8 min read · TAX TIPS › AUDIT PREP
Avg Rate
0.2%
As of 2026 DataFact
Target
Sch C
Biz Loss > 3 YrsRisk
Time
3 Years
Current LawRule

1. The Rule: How the DIF Score Hunts

You are competing against the “National Average” for your income bracket.

Discriminant Inventory Function (DIF)
What it is: A statistical algorithm that assigns a “risk score” to every return.
How it works: It compares your deductions to the norm. If you earn $100k and claim $25k charity (avg is $3k), your score spikes.
Consequence: High scores trigger manual review.

2. The 7 Red Flags (Checklist)

Avoid these statistical anomalies.

Trigger Why It Flags You Defense Strategy
1. 1099 Mismatch IRS computers match income automatically. A $50 miss triggers a notice. Wait for all forms.
2. Round Numbers Expenses ending in “00” suggest estimation, which is disallowed. Use exact cents.
3. Sch C Loss 3 years of loss implies a hobby, not a business. Show profit 3 of 5 yrs.
4. 100% Biz Use Claiming 0 personal miles on a car is statistically impossible. Keep mileage logs.
5. High Charity Donating >30% of income is an anomaly. File Form 8283.

3. Timeline: The “Open Window”

The risk does not end when you file. The “Statute of Limitations” keeps the window open.

Error Type Time Limit Risk Exposure
General Audit 3 Years
Standard Review
Substantial Error 6 Years
If >25% Income Missed
Fraud / No File Unlimited
NO EXPIRATION
Planning Note
If you claim significant deductions, it is generally prudent to archive all tax records and receipts for at least 7 years to ensure you cover the substantial error statute of limitations.

4. Strategy: The Explanatory Statement

Context kills suspicion.

  • The Move: If you have a large, unusual deduction (e.g., casualty loss from fire), attach a PDF Statement to your e-file.
  • The Logic: If the computer flags the anomaly, a human agent will review it. Seeing your explanation upfront often closes the case without an audit.

5. Warning: The Mail Audit

75% of audits are just letters (Notice CP2000).

⛔ Don’t Ignore It

This notice proposes a tax change because reported income didn’t match.

  • The Mistake: Ignoring it out of fear.
  • The Consequence: The IRS assumes their numbers are correct, assesses tax, and adds penalties.
  • The Fix: Respond within 30 days. If they are wrong, send proof immediately.

6. Frequently Asked Questions

Does e-filing increase risk?
Generally, no. It decreases it. E-filing prevents math errors, which are the #1 audit trigger.
What about Crypto?
Answering “No” to the digital assets question when you traded crypto may be considered fraudulent, keeping the audit window open indefinitely.