Key Takeaways:
- AI is reshaping IRS audits by detecting income mismatches, suspicious deductions, and multi-year patterns with greater precision.
- Filing on time and accurately is still your first defense. Late or missing returns can trigger penalties and automated audits.
- Report all sources of income, including cash jobs, side gigs, and digital app payments, even if no tax form was issued.
- Overstating deductions or mixing personal and business expenses is a top audit trigger. Keep business write-offs reasonable and well documented.
- Strong recordkeeping habits (invoices, receipts, mileage logs, bank statements) are essential and can help you avoid or survive an audit.
- Repeated business losses may trigger the “hobby loss rule,” so be sure to show a clear profit motive and business structure to stay compliant.
In 2025, the IRS is facing a shifting landscape. Although enforcement funding surged in 2022, recent federal budget negotiations, specifically the Department of Government Efficiency (DOGE) Act cuts, have reduced that long-term funding outlook. But don’t let that fool you into thinking audits are going away.
Instead of scaling back, the IRS is getting more precise. With fewer agents and a mandate to focus on efficiency, the agency is relying heavily on artificial intelligence and advanced analytics to spot tax issues with greater speed and accuracy. That means more targeted audits, especially for high-income earners, business owners, and filers with inconsistencies across returns. Here are our 5 top tips on how to avoid an IRS audit.
File Your Tax Return Accurately and On Time
No matter how much IRS funding changes, this rule never does. Currently, you must file a tax return if your gross income meets certain thresholds based on your age and filing status. If you meet the minimum income requirement and you do not file a federal income tax return, or file late. In 2025, failure to file still triggers a 5% penalty per month, up to 25% of the unpaid tax. If you also fail to pay, expect another 0.5% monthly penalty, plus 7% annual interest that compounds daily.
The IRS’s new AI tools are especially good at identifying non-filers and under-reporters, comparing your history with third-party data (like W-2s, 1099s, and even bank account patterns). If you don’t file, the IRS can file a Substitute for Return (SFR) on your behalf and those are rarely in your favor. The SFR will likely result in a larger tax bill, since tax credits and deductions will not be claimed. In short, choosing not to file a return each year will not excuse you from paying taxes. Even if you can’t pay right away, file anyway to avoid more serious penalties and show good faith.
Report All Income
The IRS’s AI doesn’t just flag big numbers—it catches mismatches. Underreporting income is one of the most common reasons taxpayers get audited. Remember, the IRS receives millions of records from employers, banks, payment platforms, and crypto exchanges. Their systems are trained to match what you report with what they receive. In 2025, that includes tighter scrutiny of digital payment apps like Venmo, Cash App, Zelle, and PayPal. This is especially true for those earning through small businesses, freelancing, or reselling. You must report all income, even if you didn’t receive a tax form. For example:
- Earned $800 from a pop-up booth? Report it.
- Sold art commissions via Instagram DMs and got paid on Venmo? Report it.
- Picked up dog-walking jobs on Rover? Still taxable.
If incomes do not match up, they will investigate your tax situation. The IRS could then give you the IRS negligence penalty. This can cost you an additional 20% of the underpaid amount in penalties. That said, it’s always best to report all earnings the first time around.
Use Common Sense with Business Expenses
Overly aggressive write-offs are one of the top audit triggers in 2025. The IRS reminds taxpayers that business expenses should be “ordinary and necessary” to produce income for your specific trade or business. In other words, items like office equipment and advertising costs are fine, but you should not try to deduct your daily lunch expenses. Examples of what often draws IRS scrutiny include:
- Deductions that exceed your gross income
- Writing off personal expenses as business ones (like groceries or vacations)
- Claiming a large home office deduction without actually having a dedicated workspace
Always separate personal and business finances, and keep detailed records to back up every claim.
Keep Good Records
Modern audits aren’t just about what you file. They’re about what you can prove. Keeping good records that support your reported income is critical. This can include invoices, canceled checks, mileage logs, and other documents. The IRS recommends keeping records for three years after filing. However, in many cases (like depreciated assets or carryforward losses), 7 years or longer is smarter. Bookkeeping can be a tedious process, so it may be best to hire a professional if you are not up to the task.
In 2025, cloud storage and accounting apps make this easier than ever. But if you’re still tracking business expenses on a napkin, it’s time to upgrade. Records to maintain:
- Receipts and invoices for every deduction
- Mileage logs for vehicle expenses
- Bank and credit card statements
- Proof of digital income (screenshot those app payments!)
- Donation receipts, especially for amounts over $250
Clean, organized documentation won’t just help you survive an audit. It may even prevent one in the first place.
Watch Out for Repeated Losses
The IRS doesn’t just look at one year. They scan trends over time and will likely audit individuals and businesses that report multiple or consecutive losses. If you’ve reported net losses for three or more years, the IRS may challenge whether your activity is actually a business. According to the “hobby loss rule,” a true business must show an intent to earn a profit. If the IRS reclassifies your business as a hobby, you’ll lose the ability to deduct most expenses. To protect yourself:
- Show that you operate professionally (with a business license, website, and invoices)
- Track advertising, product development, or client outreach
- Make adjustments to pricing or services that reflect real business intent
Especially in 2025, the IRS is focusing on digital-first businesses and creative entrepreneurs. This is because they know side gigs are common, and the lines between hobby and hustle can be blurry. Prove you’re serious about growth, and you’ll reduce your audit risk.
Frequently Asked Questions
Q: What is most likely to trigger an IRS audit?
A: The most common audit triggers include underreporting income, claiming excessive deductions, reporting multiple years of business losses, and mismatches between your return and IRS records like W-2s or 1099s.
Q: How does the IRS pick who to audit?
A: The IRS uses a mix of computerized scoring systems, AI algorithms, and red flag indicators to select returns for audit. The IRS focuses on unusual patterns, high-risk deductions, and discrepancies in reported income.
Q: What is the IRS 6-year rule?
A: The IRS can audit your return for up to 6 years if you underreport income by more than 25%, fail to file a return, or file a fraudulent return; otherwise, the standard audit window is 3 years.
Q: What happens if you are audited and found guilty?
A: If the IRS audit reveals errors or fraud, you may owe back taxes, penalties, and interest. In serious cases, you could face criminal charges or be referred to the Department of Justice for prosecution.
Q: Does the IRS look at your bank account during an audit?
A: Yes, the IRS can review your bank statements during an audit to verify income, expenses, and unreported deposits. They may request access to both personal and business accounts.
Q: Do I need a lawyer if I get audited?
You don’t always need a lawyer for a routine audit, but hiring a tax attorney or enrolled agent is highly recommended if the audit involves large sums, potential fraud, or complex issues.
Q: Does an IRS audit mean jail?
A: An IRS audit does not automatically mean jail. Most audits are civil matters. However, if the IRS uncovers willful tax fraud or criminal activity, it can lead to prosecution and possible jail time.
Tax Relief for Taxpayers
Audit risk in 2025 looks different than it did a few years ago. You may not be worried about a knock on the door. However, a letter, notice, or automated flag can still lead to time-consuming consequences. To stay clear of trouble, be sure to file on time, report every dollar, deduct expenses with integrity, keep good records, and show that your business is for profit. And remember that the best way to stay safe is not to “fly under the radar,” but to do things the right way. Accuracy, honesty, and organization will always be your strongest audit defense, especially when AI is watching. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
If You Need Tax Help, Contact Us Today for a Free Consultation
** Optima Tax Relief is a tax resolution firm independent of the IRS**