10 Ways to Avoid an IRS Tax Audit in 2025

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Some people aren’t paying their taxes. According to the latest data from the Internal Revenue Service, the tax gap for the 2021 tax year increased to $688 billion. This was more than $138 billion higher than the 2017 through 2019 tax years, so the IRS plans to double down on its efforts to close the tax gap.

Are you going to be affected by the agency’s auditing sweep? Keep reading to find out your chances of being audited and what you can do to avoid one.

How Does the IRS Choose Whom to Audit?

Your chances of being audited are low. In 2022, the IRS audited only 626,204 out of 164 million returns. That’s an audit rate of less than 0.4%.

Since then, the number of audits dropped even more. In 2023, the IRS received just over 271.5 million tax returns and other forms. By contrast, it only audited 582,944 tax returns for an audit rate of about 0.2%.

However, because of the widening tax gap, the IRS may be auditing a higher number of taxpayers this year. In particular, the agency aims to direct increasing scrutiny toward high-income, high-wealth individuals.

That doesn’t mean you’re off the hook if you don’t belong in that category; it just means that more people overall may get audited in 2024. According to the IRS, its auditing choices depend on statistical formulas and random selections. So whether you make a lot of money or earn the minimum wage, you still have a chance of getting audited.

10 Ways To Avoid an Audit

So, how can you avoid a tax audit?

Unfortunately, there’s no guaranteed way to avoid an IRS audit. But following these recommendations will help you steer clear of discrepancies that can lead to your account being flagged for a closer look.

1. Be Honest

The biggest piece of advice is to report all of your income honestly. This isn’t limited to your regular wages or self-employment income either. You should be reporting all taxable income, including:

• Employee compensation: This may include wages, salaries and commissions. It can also include tips, fees and fringe benefits or stock options.
• Self-employment income: This includes income earned as an independent contractor, gig worker, part-time business owner or sole proprietor. Report any net income above $400.
• Business and investment income: If you earn income from investments, like a personal property rental, or business, you should report it. You may also be able to claim certain tax deductions for business-related expenses.
• Capital gains income: Capital gains occur when your property or asset rises in value over its original purchase price. You generally won’t have to pay taxes on this unless you realize those gains, which happens when you sell the asset. Short-term capital gains (assets held for less than 1 year) are taxed at ordinary income rates, while long-term capital gains are generally taxed at a lower rate.
• Partnership income: While partnerships aren’t generally considered taxable, you still need to report your share of any income, gains, deductions, credits or losses.
• Other types of income: Commonly reported income includes royalties, income from bartering, virtual currencies and prepaid income (e.g., advanced compensation for services not yet rendered).

As you report your income, be as accurate as possible with your tax deductions and claimed expenses, which can result in a larger refund. It may seem like an obvious tip, but staying truthful from the beginning will make any potential audit much easier to resolve.

2. Accurately Report Your Income

Don’t estimate; calculate. The IRS will receive wage information from your employer and financial institutions, so you may be flagged for an audit if the numbers don’t add up. This is especially true for high-income individuals as the IRS steps up its auditing of higher tax brackets in 2024.

If you’re a business owner and report a net annual loss, make sure you have the documents to back it up. The IRS might flag you for underreported income and audit your financials.

As for how to keep track of your income (and expenses), you’ve got options. You can use accounting software like QuickBooks. Or you can use an app like Mint. Alternatively, you can write down your every income and expense manually. Just be sure to keep any receipts or invoices and record every transaction as soon as it occurs so you don’t miss anything.

3. Don’t Abuse the Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a tax break for low- and moderate-income households. Those who qualify could get a larger refund or reduce their tax liability for the year.

But don’t abuse this credit. The IRS audits tax returns that claim the Earned Income Tax Credit more frequently than any other type of return. So before claiming this credit, ensure that you really do meet the relevant income requirements.

The EITC’s basic requirements include:

• Having earned income and/or investment income below the limit
• Being a U.S. citizen or resident alien all year long
• Having a valid Social Security number
• Not having filed Form 2555, Foreign Earned Income

For 2024, the maximum income limit for single filers, heads of household and qualifying surviving spouses is $59,899. It’s $66,819 for those married filing jointly.

You may also need to meet additional rules, which you can find on the IRS’s page.

4. Follow the Rules for Foreign Accounts

The IRS requires all U.S. citizens and resident aliens to report foreign income, including regular wages and unearned income. Even if you live and work in another country, your income is still subject to income tax. You may, however, qualify for the Foreign Tax Credit or the Foreign Earned Income Exclusion, which could lower your tax liability.

If you own a foreign or offshore account, be sure to follow the rules. Income, like interest or ordinary dividends, from foreign bank accounts and foreign trusts must be reported on Schedule B (Form 1040). Depending on your situation, you may also have to file Form 8938 for foreign financial assets exceeding a certain threshold limit.

Essentially, disclose all of your financial holdings regardless of where they’re located.

5. Be Careful with What You Claim as a Business Expense

The IRS uses industry benchmarks to evaluate what’s reasonable when it comes to business expenses and examines any returns that fall far enough outside the lines. This means you should be careful about using a business vehicle for personal trips and with what you claim as a home office expense.

If you run a business, you may want to itemize any tax deductions you’re claiming. That way, the IRS can clearly see each deduction and, ideally, won’t flag you for an audit. You can itemize quite a few expenses, including travel, inventory, supplies, insurance, utilities, advertising, legal fees and equipment rentals.

6. Report Income From Gigs and Side Hustles

Engaging in for-profit business activities outside of a salaried position may count as independent contractor work and is subject to reporting requirements.

It doesn’t matter if the work was temporary, seasonal or a side job. As long as you earn at least $400 from it, you’ll need to report it. If you qualify as an independent contractor, you may also need to pay estimated taxes each quarter.

7. Determine Whether Your Hobby Is Actually a Business

You may have a hobby that you enjoy doing recreationally, but it may also make you money. Generally speaking, a “hobby” is an activity you do because you enjoy it. You don’t make money off of it. A “business” is anything you do with the goal of earning money.

But sometimes, a hobby can turn into a business even if you don’t mean for it to happen. Read up on how the IRS distinguishes between a hobby and a business, and report your income accordingly.

8. Don’t Forget to Report Earnings from Cryptocurrency

Digital or virtual assets, like cryptocurrency or non-fungible tokens (NFTs), may also be taxable. However, many people mistakenly believe that crypto profits aren’t taxed like other forms of income. While that may have been true in the early days of digital currency, most cryptocurrency exchanges now comply with the government’s reporting requirements.

As far as U.S. tax law goes, digital assets are anything that’s stored electronically and can be purchased, owned, sold, traded or otherwise transferred. Digital assets are viewed as “property” rather than currency.

When you file taxes, you’ll need to answer a few questions about your digital assets. You’ll also have to report any taxable gains or losses, incurred whenever an asset is sold. You can calculate these based on factors like the type of digital asset, when you made the transaction, the number of units sold, the asset’s fair market value and the basis on which it’s sold.

9. Value Your Assets Appropriately

The IRS has valuation experts who examine whether you’ve correctly reported the value of assets like real estate or works of art. The same goes for business. The IRS accepts these three main valuation approaches:

• Asset-based approach: This values your tangible assets based on the sell prices of similar assets.
• Market approach: The competitive landscape and selling prices of similar assets or businesses play a crucial role in calculating your asset’s value.
• Income approach: With this, the overarching goal is to determine an asset’s value based on the anticipated rewards and risk involved. This approach can also be used to predict a business’s future cash flow and market value.

Ensure that you get multiple qualified appraisals for any high-value assets before submitting your tax return. Keep any relevant financial statements for further analysis about the asset’s original and adjusted value, particularly if it brings in income or cash flow.

10. Don’t Falsely Claim Dependents

The IRS has strict rules when it comes to claiming dependents on your tax return. Firstly, you can’t claim a dependent if they’re already being claimed on another return. For example, both parents can’t claim the same child as a dependent if they’re filing separately.

To qualify for certain tax credits or deductions, a dependent must meet all of the following rules:

• Be a U.S. citizen, national, resident alien or resident of Mexico or Canada
• Not be claimed on someone else’s return (with very few exceptions)
• Not be your spouse (if filing jointly)
• Not be able to claim a dependent when filing their own tax return
• Count as either a qualifying child or qualifying relative (filing, relationship, residency, income and age restrictions may apply)

Note that you may want to claim a dependent if doing so would qualify you for a credit like the EITC, Child and Dependent Care Credit or Child Tax Credit. Each tax credit and deduction has its own requirements, usually pertaining to income.

Other Ways to Avoid a Tax Audit

Some other ways to avoid a tax audit include:

• Filing taxes on time: The filing deadline for taxes is April 15, 2025 (though you may also have to pay estimated quarterly taxes). Filing and paying your taxes on time can help avoid an audit. It also decreases the risk of getting hit with a Failure to File and a Failure to Pay penalty.
• Filling out every relevant form: Filing taxes means filling out plenty of forms, like Form 1040. Some people need to complete other forms. For example, small business owners typically need to complete Schedule C to report any profits and losses.
• Avoiding amended tax returns: If you’ve filled out something incorrectly, you may need to send an amended return. However, making major changes to an existing tax return could be a red flag for the IRS.
• Ensuring everything is current: On that note, triple-check everything to ensure it’s accurate and up to date. This includes seemingly little things like your address or the way your name is spelled. But it also includes more major things like the numbers you use when reporting income.
• Keeping clear, accurate records: Your financial documents, whether they’re invoices, bank statements or receipts, should be accurate. Keep the original documents and copies in a safe place so you have them in case you need them.

What Happens If You Do Get Audited

If your account is selected for an audit, here’s a basic overview of what happens:

1. You’ll receive a notification from the IRS by mail. The agency will never contact you by phone. 
2. Your audit may be managed by mail or through an in-person interview to review your records. This could take place in an IRS office, your home or your place of business.
3. You’ll need to provide a list of documents specified by the IRS. Remember, you’re required by law to keep all of the records you used when preparing your tax return for at least three years after filing.
4. If you can prove that your taxes were filed correctly, there will be no further action.
5. If you agree with the audit’s findings, you may have to make an IRS payment.
6. If you disagree with the findings, you can request additional mediation or file an appeal.

Don’t panic if you’re selected for an audit. Simply follow the official procedures and consider seeking professional advice for how to handle an audit.

Key Takeaways

While getting audited is a relatively rare occurrence, it’s possible that the IRS will conduct them more frequently to close the widening tax gap. The best course of action is to honestly report your income and keep good records of all your financial documents. That way, if you do end up receiving an audit notice in the mail, you can approach the situation calmly and confidently.

Preston Hartwick contributed to the reporting of this article.

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