Every tax professional has a mental list of “audit triggers," but exactly which elements of a modern return throw up the IRS red flags? Drawing on current IRS guidance and regulatory-ethics principles, we're providing a practical, preparer-focused checklist you can use to ensure best practices for your clients' returns and map compliance strategies for the coming tax year.
IRS red flag #1: Data integrity
Before questions of “taxpayer intent” arise, the IRS evaluates whether the return can be processed at all. A single digit out of place in a Social Security number, an EIN that fails to match the Business Master File, or an address inconsistent with the last filing will stall an e-file submission. Rejected transmissions are frequently routed for correspondence examination once they are resubmitted. Platforms like GruntWorx, Lisio, and TaxCaddy can eliminate most data-entry errors, but only if practitioners insist on original source documentation, not prior-year PDFs or client-prepared spreadsheets.
IRS red flag #2: Automated under-reporter (AUR) mismatches
For the 2025 filing season, the IRS expects to match roughly 3.5 billion information documents to 1040 and business-entity returns within forty-eight hours. A missing or misstated Form 1099, K-2/K-3, or crypto-exchange statement virtually guarantees a CP2000 notice and an accuracy penalty. For both new client and those who clients who have changed employers or act as financial custodians, obtain the wage-and-income transcript before transmitting the return. Non-filer engagements require at least six compliant years and an unreported 1099 from an earlier year can still generate an AUR inquiry after the fact.
IRS red flag #3: Rounded numbers and "perfect" ratios
Another IRS red flag that examiners have confirmed is a Schedule C or Schedule E whose expenses repeatedly end in “000." This is an immediate audit candidate. The modern Discriminant Function (DIF) algorithm flags distributions that look more like human estimation than meticulous record-keeping. Circular 230 §10.34(d) does not obligate the preparer to audit the client, but it forbids ignoring information that appears “incomplete, inconsistent, or suspect.”
When the numbers look too tidy, request substantiation and document the inquiry in your file. If legitimate documentation exists, proceed. Without support, recommend a reasonable, properly disclosed estimate.
IRS red flag #4: Form 8275 and 8275–R
Many practitioners still assume that attaching Form 8275 is another IRS red flag, but not necessarily. Clear disclosure reduces exposure to §§6694(a) and (b) preparer penalties and signals transparency to the IRS. Use Form 8275 when the position lacks adequate disclosure elsewhere on the return and use 8275-R when the position conflicts with a regulation or other published guidance. State the facts succinctly, cite authority, and retain supporting analysis in the engagement file.
Download our FREE ebook Excel automation for accountants
With step-by-step tutorials and real world examples, learn valuable automation functions in Excel that save time, improve accuracy, and and enhance your skills!
IRS red flag #5: Non-cash charitable contributions
Field agents are likely to deny the entire deduction without adjusting value when the taxpayer fails to meet the strict substantiation rules related to non-cash charitable contribution deductions. Contributions of property valued above $5,000 require Form 8283 Section B and a qualified appraisal dated within sixty days of the donation. Curator letters, Zillow printouts, and standard receipts are not considered appraisals.
If the 60-day window has elapsed, file the appraisal anyway, as a non-conforming appraisal is preferable to none at all.
IRS red flag #6: Hobby-loss presumption and the Gullion Clarification
Three consecutive loss years (or two of seven for equine activities) create a rebuttable presumption of a hobby under §183. IRS tax return examiners assert that a taxpayer with a full-time W-2 position cannot simultaneously operate a bona-fide business. The court case, Thomas Allen Gullion v. Commissioner, T.C. Summ. Op. 2013-65, rejects that claim, holding that a taxpayer may pursue more than one trade or business concurrently.
However, if this applies to a client, you should secure a business plan, marketing materials, and contemporaneous logs to demonstrate profit motive and satisfy the nine hobby-loss factors.
IRS red flag #7: Filing with incomplete information
If you submit a return knowing it's incomplete, this violates Circular 230 §10.34(d) and may expose you to §7206(2) penalties. If a critical Schedule K-1 or digital-asset statement is missing near the deadline, consider filing on extension or, if extension is impractical, over-reporting income with an attached Form 8275 explaining the methodology. Silent omission is indefensible.
IRS red flag #8: Refundable credit due diligence
The IRS does audit preparers for Earned Income Tax Credit, Child Tax Credit, and American Opportunity Credit compliance. Keep Form 8867 and make sure to document additional inquiries (school records, lease agreements, medical statements) as required by Reg. §1.6695-2(b).
Build your tax knowledge with Becker
Whether you're just starting out as a tax preparer or you have decades of experience, Becker can help you achieve more!
Enrolled Agent Exam Review
Enrolled Agents have unlimited representation rights before the IRS and proven knowledge of individual and personal taxation, which opens the door to more career opportunities and earning potential. Check out our EA Exam Guide to learn more how to take this next step in your career.
Continuing education for tax professionals
Becker offers over 700 on-demand CPE courses, 1,000 live webcasts annually, and weekly CPE podcasts for CPAs. For EAs, we offer over 100 IRS-approved CE courses to help you meet your requirements and build the knowledge and skills you need in your career.
Related Articles
Share
