Understanding how to avoid an IRS audit can save you from getting that dreaded notice from the IRS in the mail. You’re being audited, and you picture a hostile examiner going over your books with a fine-toothed comb, looking for the slightest mistake so they can fine you thousands of dollars or even accuse you of tax fraud.

Don’t panic.

While the mere thought of an audit might send shivers down your spine, the truth is that audits are rare. Less than 1% of tax returns get audited each year, according to IRS statistics. Still, keeping your finances in order and understanding what raises red flags can go a long way in helping you avoid unnecessary IRS scrutiny.

Let’s walk through some key steps to keep your tax return audit-proof (or at least as close as possible). And don’t worry—if you ever do get audited, there are ways to prepare so you can breeze through without any trouble.

Report all your income (yes, even that side hustle)

The IRS gets copies of your W-2s, 1099s, and other income statements, so they’ll notice if you don’t report a freelance gig or a little side hustle money.

Even if you didn’t receive a 1099, all income is technically taxable. The best practice? Keep track of everything, report it accurately, and don’t assume small amounts will fly under the radar. Discrepancies between what you report and what the IRS already knows can trigger an audit.

The good news is that forgetting to report the $25 in interest you earned from your checking account usually won’t trigger a full-blown field audit where an auditor visits your home or business. Instead, they’ll likely send you a CP12 notice. This is an IRS notice saying the agency is correcting a mistake on your return, and if you agree with the IRS’s change, all you need to do is pay the additional tax due (if any).

Double-check your math (and other numbers)

It might sound basic, but math errors are a common reason for IRS notices. If your numbers don’t add up, the IRS may review your return more closely. Luckily, tax software does the heavy lifting for you, but if you’re doing it manually, take the time to verify your calculations.

While you’re at it, double-check other numbers on your tax return, like Social Security numbers (SSNs) for you and your dependents and your employer identification number (EIN). Little mistakes like an incorrect SSN can lead to IRS notices.

Don’t be too “creative” with deductions

Deductions and credits are great, but only if they’re legitimate. If you’re claiming unusually high business expenses or charitable donations, the IRS might take a closer look—especially if your write-offs seem excessive compared to your reported income.

While any unusual credits or deductions can trigger an audit, a few areas are especially prone to abuse and thus get more attention from the IRS:

Meals, entertainment, and travel expenses

These are some of the most frequently abused deductions because business owners claim personal expenses as business expenses. Currently, entertainment expenses are not deductible at all. Business owners can deduct 50% of business meals, such as taking a client out to dinner or solo while on a business trip. Travel expenses are deductible as long as the trip is primarily for business purposes.

There are a lot of additional rules for claiming meals and travel expenses (which you can find in IRS Publication 463). For now, just know that extensive write-offs in this category might lead to the IRS selecting your tax return for audit.

Home office

You can claim the home office deduction if you regularly and exclusively use part of your home (or a separate structure on the property) for work.

Business owners sometimes run into trouble claiming home office expenses when the company has a primary location elsewhere. You might also face an IRS audit if you claim an excessively large home office. For example, if your home is 1,300 square feet, the IRS might question claiming 1,000 square feet as a home office.

Business miles

Business owners often use their personal vehicles for business, like running errands or visiting clients or job sites. The trouble is that the IRS requires them to keep records of their business miles, and very few people keep a mileage log.

It’s okay to deduct mileage, but make sure you have supporting documentation. If you don’t keep a log—either written or using an app—you can recreate your mileage log using your calendar. Just don’t abuse this area because it can be a big target for an IRS audit.

Keep business and personal expenses separate

If you run a business or freelance, keep a separate bank account and credit card for business expenses. Many new small business owners use their personal checking accounts and credit cards for business expenses. This isn’t technically against the rules if you’re a sole proprietor. Still, it can make the IRS audit process a lot more complicated because the examiner will want to comb through your personal and business expenses.

The same goes for payment platforms like Venmo and PayPal. Many business owners use one app for both business and personal payments. This complicates things when the platform issues a Form 1099-K that includes both payments from customers and personal transactions like money you collected from friends when you split the check at a restaurant.

If the IRS audits your return, the burden of proof is on you to prove that certain deposits are non-taxable personal transactions and others are taxable business transactions. And who keeps receipts from a dinner out with friends three years ago?

If you’re an LLC or corporation, keeping separate business accounts isn’t just a best practice; it’s necessary for maintaining the legal separation between your personal and business finances.

Avoid rounding

It can look suspicious if your tax return is full of nice, even numbers—like claiming exactly $5,000 in office expenses, 10,000 in business miles, and $7,000 in charitable donations. The IRS understands actual expenses usually involve cents, so overly rounded figures could raise a flag.

Excessively rounded numbers make it look like you’re estimating rather than reporting actual figures.

Be cautious with cash transactions

Cash-heavy businesses (like restaurants, salons, or independent contractors) tend to draw more IRS attention. If the bulk of your income comes in cash, have solid records of deposits, invoices, and receipts to back it up.

The IRS knows cash businesses have more room for underreporting, so they tend to audit them more frequently.

Document everything like a pro

Good record-keeping is your best defense if the IRS ever comes knocking. Save receipts, invoices, bank statements, and documents supporting your deductions and income. Digital copies are acceptable, but make sure they’re well-organized and easy to access.

The IRS typically audits returns filed within the last three years. They can go back up to six years if they suspect significant errors. Keep records for at least that long.

What if you still get audited?

Even if you follow all the rules, audits can still happen. But don’t panic—most audits are just simple verification requests rather than full-blown investigations. Here’s what to do if you receive notification your tax return is being examined or audited:

• Stay calm. If you got an IRS notice, it doesn’t automatically mean you did something wrong. You may have been randomly selected, and even the IRS makes mistakes.
• Respond promptly. If the IRS requests documentation, reply or submit documentation promptly.
• Get professional help if needed. A tax attorney, certified public accountant (CPA) or enrolled agent (EA) can help you navigate the audit process by responding to notices and talking to the examiner on your behalf.
• Be organized. Having your records ready makes the process much easier.

IRS audits are rare, but staying organized, reporting income accurately, and keeping solid documentation minimizes your chances of being selected. Think of it like flossing—if you do it consistently, you’re less likely to have painful surprises down the road.

If you need help tracking your income or expenses, organizing your receipts, or dealing with the IRS, reach out to Countless.