Most people picture an IRS audit as a shadowy government agent flipping through shoeboxes of receipts, looking for any reason to ruin someone's life. The reality is both less dramatic and, in some ways, more sobering. Most taxpayers aren't caught by human investigation. They're flagged by software that runs automatically the moment a return is processed, which is why knowing what triggers an IRS audit matters long before you file.
Jacob Simany spent years inside the IRS as a trial attorney in advisory and litigation, working directly with collections officers, auditors, and agents, and litigating in U.S. Tax Court representing the IRS. What he saw from the inside shapes how Oro Tax Advisors helps clients stay defensible today. Here's what he says most taxpayers don't know.
How the IRS Actually Finds You
The IRS already knows a significant amount about your income before you file a single page. Every W-2 your employer issues goes to you and to the IRS. Every 1099 a client or platform sends you has a copy going to the IRS as well. Brokerage statements, real estate sale proceeds, retirement distributions, all of it flows to them through information reporting.
When you file your return, a computerized system automatically cross-references what you reported against what the IRS already has on file. If the numbers don't match, the system flags it and generates a notice without a single human being reviewing your case. That letter you get in the mail may never have touched an IRS employee's hands.
The mismatched income trigger is one of the most common, and most avoidable, reasons people end up with IRS problems. If you received a 1099 and forgot to include it, or if a payroll company issued a duplicate W-2 by mistake, the system doesn't know the difference. It just flags the discrepancy and sends the bill.
The Eight Things That Raise a Return's Risk Score
Beyond the automated income matching, the IRS uses what's called a DIF score, a proprietary, algorithm-driven risk score assigned to every return. The exact formula is kept confidential, reportedly known only to a handful of people at the top of the agency. But based on what gets flagged in practice, certain patterns reliably push that score higher.
Large losses on Schedule C or through business entities draw attention when they look outsized relative to the business's size or industry. A one-person consulting firm claiming $200,000 in meals and entertainment is going to look different from a restaurant doing the same. The IRS uses internal industry benchmarks, which aren't public, but they exist, to identify expenses that fall outside the norm for a given type of business.
Charitable deductions become a problem when they're disproportionate to reported income. Jacob handled a case where a taxpayer claimed $50,000 in donations one year and $40,000 the next on an income of $150,000. Donating a third of your gross income is unusual enough that the IRS pulled the return, and when they asked for documentation from the qualifying nonprofits, the taxpayer couldn't produce it.
Offshore accounts and foreign financial activity trigger a separate compliance requirement entirely. FATCA and FBAR rules require reporting of foreign bank accounts, and failing to do so doesn't just raise audit risk, it carries its own penalties.
Cash-heavy businesses face a specific vulnerability that's only growing. The IRS has become increasingly creative about reconstructing income for businesses that deal in cash. In one case Jacob describes, the IRS filed a summons on the water company to compare a laundromat's water usage against similar businesses in the area. Another approach: barbershops and salons that use booking apps like Vagaro can have their appointment history summoned, making it straightforward to calculate how much revenue was actually generated versus how much was reported.
Crypto is treated the same as any other capital gain, the IRS receives 1099s from regulated exchanges like Coinbase and Robinhood, and it's developing blockchain and wallet analysis capabilities to track transactions that happen outside those platforms. Agents have been trained on it and are training others.
Round numbers are a surprisingly powerful flag. If every line item on a Schedule C is a clean, even number, $10,000 for rent, $5,000 for utilities, $2,000 for supplies, it reads to the software the way it reads to a human: fabricated. Real business expenses tend to end in odd cents. If you're keeping proper books with actual receipts, the numbers will naturally be irregular.
Amending a prior year return guarantees human review. Electronic returns are processed automatically, but amended returns must be paper-filed and mailed, which means an actual IRS employee opens it, reads it, and manually keys it into the system. That's a level of scrutiny you don't get on an original filing. Jacob's advice: don't amend unless the savings are worth it, the error is significant, you're certain of the correction, and you have the documentation to support it.
Social media has quietly become one of the IRS's most useful investigative tools. When an agent opens a new case, the first thing many of them do is search the taxpayer's name online. If your return shows $60,000 in income and your Instagram feed is full of luxury cars and international travel, that gap doesn't go unnoticed. The IRS is specifically developing training around content creators and influencers, including the treatment of free products and brand partnerships as taxable income.
What the IRS Is Actually After
The IRS publishes something called the Dirty Dozen list every year, an official list of the tax schemes they're actively pursuing with the most resources. Conservation easements have been on it for years. So has micro-captive insurance. Influencers with bad tax advice are next. These aren't secret enforcement priorities; they're published because the IRS wants the tax community to know where scrutiny is being directed.
When Jacob was at the IRS, he litigated a conservation easement case involving a mine in Georgia that had been appraised at $25 million by its owners. The IRS brought in its own experts, valued the mine at $35,000, and won a 10-day trial. The lesson isn't that conservation easements are inherently fraudulent, it's that inflated valuations will be scrutinized, expert witnesses will be called, and the outcome depends entirely on how well you can defend your numbers.
Things Most Taxpayers Get Wrong
One of the most persistent misconceptions is that not paying taxes leads to jail. For most taxpayers, it doesn't. The IRS's primary tool is civil collections, not criminal prosecution. What happens when you owe and don't pay is a series of notices, followed by a federal tax lien on your assets, followed eventually by a levy, which is a formal seizure. Bank accounts, wages, cars, real property, and business equipment are all fair game. In one of Jacob's cases, the IRS physically went to a small airport in Long Island to verify the existence of a $65,000 plane they had placed a lien on to later levy and seize it.
Criminal prosecution, and the possibility of jail, is reserved for situations involving clear and intentional fraud, large amounts of unreported income over multiple years, and often, high-profile individuals where making an example has value. The IRS has a dedicated Criminal Investigation division for this, and its agents carry badges and guns. For most ordinary taxpayers who made mistakes or got into trouble with payments, civil resolution is the path.
"Auditors respond to cooperation and good faith. Being organized, honest, and responsive doesn't just feel right, it genuinely changes audit outcomes."
Another common belief is that filing an extension reduces audit risk. It doesn't. If anything, there's a mild argument that it could work the other way, fewer returns are being processed during extension season, meaning there's marginally less cover in volume.
The statute of limitations for audit is three years from the filing date in most cases. That extends to six years if you underreported income by more than 25%, and becomes unlimited if fraud is involved or no return was filed at all.
IRS agents are also human beings. Jacob makes this point not to comfort anyone, but because it has practical implications. Auditors respond to cooperation and good faith. Being organized, honest, and responsive doesn't just feel right, it genuinely changes audit outcomes. The agents who worked cases alongside Jacob had lives outside the office, had bad days, and exercised discretion in how aggressively they pursued certain items. That discretion often went in the taxpayer's favor when the taxpayer wasn't making their life harder.
If You're Already Under Audit
The first and most important move is representation. The tax world is specialized enough that there are attorneys and CPAs who do nothing but IRS resolution work, they're not the same as the person who files your return every year. Choose someone who understands IRS procedure specifically, not just tax law.
Beyond that, the rules are simple: answer what's asked, provide what's requested, and don't volunteer anything extra. IRS agents will sometimes ask questions they already know the answers to in order to see whether you'll be consistent. Changing your story or providing information that opens new lines of inquiry is how a limited audit becomes a comprehensive one.
Procedure matters as much as substance. You can be factually correct about a deduction and still lose if you failed to follow the right process at the right time. In collections due process cases, for instance, failing to raise an argument in the initial hearing can mean losing the right to raise it at all.
The Internal Revenue Manual, the actual playbook IRS agents use, is publicly available. Searching it is free. So is the Dirty Dozen list. If you're curious about what standards your expenses will be evaluated against, these are the places to start.
The Documentation Principle
The thread running through every audit scenario Jacob describes is documentation. Not just having records, but having records that were created at the time, are consistent with what was claimed, and can be produced clearly when requested.
He tells the story of an accountant who claimed 60,000 miles of business driving in a single year, which calculates to roughly 164 miles a day, every day, living in New York City, where traffic makes that essentially impossible. When asked for vehicle logs, he had nothing. Compare that to a home office claim where the same taxpayer sent photos showing desks, monitors, filing systems, and a company banner in the front yard. The agents accepted the home office. They rejected the mileage. The documentation told the story.
This is the standard Oro Tax Advisors holds clients to, not just knowing the strategies, but making them defensible. Real estate professional status, cost segregation losses, home office deductions, mileage, meals, all of them are legitimate when they're real and documented. None of them survive scrutiny when they're not.
If you're wondering whether your current structure and documentation would hold up, that's exactly the conversation we'd like to have.
Would your documentation hold up?
Book a call with the Oro Tax Advisors team. We'll look at what you're doing, identify where the exposure is, and help you build the kind of records that let you claim every deduction you're entitled to, confidently.
This article is for educational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional before implementing any strategy.