The IRS releases an annual warning about tax schemes and compliance risks, but the agency’s broader enforcement guidance reveals something equally important for ordinary filers. Many audits begin not with suspected fraud, but with small discrepancies, missing records, or deductions that stand out compared with similar tax returns.
For the upcoming filing season, the IRS has highlighted several behaviors that frequently trigger additional scrutiny. Some involve complex arrangements promoted by aggressive tax advisers, while others stem from everyday mistakes like forgetting to report income from a freelance job or claiming deductions without documentation.
The agency recently added another issue to its enforcement radar: abusive claims connected to undistributed long-term capital gains reported on Form 2439. While the form itself is legitimate, promoters have encouraged investors to misuse it in ways that can lead to improper refunds. That warning joins several long-standing red flags that regularly lead to IRS correspondence exams and audits.
Income Mismatches and the Automated Dragnet
The most common trigger for IRS contact is simple: income reported on a tax return does not match the records already in the agency’s system. Employers, banks, and brokerages send copies of W-2s and various 1099 forms directly to the IRS, which are then compared against each taxpayer’s filing.
If those numbers do not line up, the discrepancy is flagged through the agency’s Automated Underreporter program. When a mismatch is confirmed, the IRS typically sends a CP2000 notice explaining the difference and proposing additional tax.
This system catches everything from unreported interest income to forgotten freelance payments. People who juggle multiple income streams are particularly vulnerable. A taxpayer might receive several 1099-NEC forms for contract work or dozens of brokerage statements reporting dividends and stock sales. Missing even one of those forms can trigger the automated notice process.
Returns also pass through statistical screening models referenced in the IRS examination procedures manual. The agency uses a scoring system known as the Discriminant Index Function, or DIF, to identify returns that look unusual compared with similar taxpayers. Extremely high deductions relative to income, or unusual changes from previous filings, can raise the score and push a return toward further review.
Business Deductions Without Clear Records
Self-employed taxpayers and gig workers often face higher scrutiny because their deductions rely heavily on documentation. One of the most common problem areas involves vehicle expenses claimed on Schedule C.
IRS examiners follow detailed internal guidance when reviewing those deductions, including recordkeeping standards outlined in IRM 4.19.15. A mileage log created at or near the time of each trip is considered the most reliable proof of business use.
Without that log, deductions for gas, repairs, and depreciation can quickly unravel during an audit. The agency’s Publication 463 explains that taxpayers must be able to show the date, destination, purpose, and mileage of each business trip.
This requirement affects far more than traditional small-business owners. Rideshare drivers, real estate agents, traveling consultants, and independent sales representatives all depend on vehicle deductions that can total thousands of dollars each year. When records are incomplete or reconstructed months later, examiners often disallow the expense entirely.
The safest approach is simple recordkeeping. Many taxpayers use mileage-tracking apps or maintain a small notebook in the car. Keeping receipts and separating personal travel from business use makes it much easier to support the deduction if the IRS asks questions.
Refundable Credit Claims That Do Not Add Up
Another category the IRS watches closely involves refundable tax credits. Credits such as the Earned Income Tax Credit and the Additional Child Tax Credit can generate large refunds even when a taxpayer owes little or no income tax.
Because of that, they have historically been targets for improper claims and filing errors. When reported income, filing status, or dependent information does not match IRS records, the agency may freeze the refund while reviewing the return.
The IRS has increased automated checks to verify eligibility for these credits. Simple mistakes, such as claiming a dependent who was already listed on another return, can trigger additional review. In many cases the issue is resolved with documentation, but the process can delay refunds for weeks or months.
New Scrutiny Around Capital Gain Reporting
The IRS also warned taxpayers about promoters encouraging abusive strategies tied to undistributed capital gains reported on Form 2439. The form is typically issued to investors in certain regulated investment companies or real estate investment trusts.
In legitimate situations, the form reports gains that were retained by the fund but still treated as taxable to the investor. Problems arise when promoters claim those amounts can be used to generate refunds or credits that the tax code does not actually allow.
The agency flagged these arrangements in its annual Dirty Dozen tax scams list, warning that both promoters and participants may face enforcement actions if the strategy crosses into fraudulent territory.
Because the paperwork involved can be technical, investors sometimes do not realize the claim is improper until the IRS challenges it. That risk highlights why tax professionals often advise skepticism toward strategies promising unusually large refunds or guaranteed tax savings.
Automated Enforcement Is Expanding
The number of in-person audits remains relatively low compared with previous decades, but automated enforcement continues to expand. The IRS Data Book shows that correspondence exams and automated notices account for the vast majority of enforcement contacts with taxpayers.
A review by the Government Accountability Office also noted that automated matching systems now drive much of the agency’s compliance work, as described in a GAO report examining IRS enforcement tools.
That trend means many taxpayers encounter the IRS through letters rather than traditional audits. The notices typically request clarification or documentation rather than alleging wrongdoing. Still, responding to them can take time and may lead to additional tax assessments if the underlying records are incomplete.
For most filers, avoiding those red flags comes down to a few basic habits. Report every income document received, keep records for deductions, and approach complicated tax strategies with caution. In a system increasingly driven by data matching and automated scoring, accurate reporting remains the simplest way to stay out of the IRS enforcement pipeline.
