You probably seen the headlines:
"IRS funding slashed "Audit rates down." "Staffing cuts."
If you're a business owner, an investor, or a member of a high-income family, you might be thinking: Finally, some breathing room.
But here is the reality:
The IRS is not backing off. It's just growing smarter about who it targets.
The IRS Isn't Auditing Everyone—Just the “Right” People
With fewer agents and a focus on efficiency, the IRS is relying more than ever on technology, specifically the Discriminant Inventory Function System , or DIF.
Consider DIF as a risk-scoring engine for tax returns. It compares your data (income, deductions, and expenses) to national averages for similar taxpayers. If your return differs from the norm for your income level, industry, or filing status, you will receive a higher score and increase your audit risk.
Do you want to get deeper into the DIF system? Read the GAO's breakdown of how the IRS selects returns for audit.
What Gets Flagged? Here Are the Most Common Red Flags:
According to industry data and IRS enforcement patterns, some of the top audit triggers are:
Unreported income covers everything from 1099 income to tips, cryptocurrency earnings, and rental income. If the IRS has a record of it and you did not include it, you may be receiving a CP2000 notice.
Large deductions vs. income - If you make $75,000 and claim $40,000 in business deductions, the DIF will take note. This is especially true for Schedule C taxpayers.
Crypto transactions - Digital assets are becoming a popular audit target. If you're dabbling with cryptocurrency but don't complete IRS Form 8949 or tick the crypto box, you're on thin ice.
Repeated business losses - If your company routinely reports losses, the IRS may define it as a hobby rather than a business, disallowing deductions.
Cash-intensive industries - Restaurants, salons, contractors, and others that rely significantly on cash are frequently investigated for underreporting.
Home office deductions: A typical mistake? Claiming a home office without meeting the stringent "exclusive and regular use" requirements.
Fewer Letters Don’t Mean Less Risk
Today's IRS isn't about physical mail or phone calls.
It's about algorithms and matching engines silently assessing your data and sending out alerts like the CP14 (balance due) or CP2000 (income mismatch) months after you file.
Often, taxpayers are unaware they have been tagged until interest and penalties have begun to accrue.
What You Can Do Now
The good news is that you don't have to be terrified of an audit; all you have to do is prepare.
- Check your returns for correctness and consistency with any W-2s, 1099s, or cryptocurrency reports.
- Maintain accurate records of deductions, mileage, and business expenses.
- If you're unsure about a previous return or received a notification, don't disregard it—review it with a professional.
- Be aware that audit selection is increasingly based on trends rather than income level.
Need a Second Opinion—or a Bit of Peace of Mind?
If something on this list applies to you or if you received a confused notification from the IRS, don't make assumptions.
Our office can assist you with reviewing your IRS transcripts, explaining the notification, and determining whether action is required.
There are no fear tactics. Just frank replies based on what is currently happening inside the IRS.
Contact our office if you need assistance analyzing your position or understanding your risk. We are here to guide, not to judge.
