The 2025 tax law (the “One, Big, Beautiful Bill” or OBBBA) introduced sweeping changes to deductions, credits, and business expensing. While many taxpayers legitimately benefit from larger deductions and updated thresholds, the new rules also create fresh IRS audit risks. Aggressive claims, mismatches between federal and state treatment, and reporting changes (especially for marketplace and gig income) are among the top red flags the IRS will be watching in the coming tax filing season 2026.

This guide explains the most important IRS audit red flags after the 2025 tax law and practical, step‑by‑step safeguards for taxpayers to avoid problems.

WHY 2025 CHANGES INCREASE AUDIT RISKS?

The IRS uses document matching, algorithms, and targeted industry programs to select returns for examination. Two broad reasons the 2025 law increases audit touchpoints:

  1. More complexity and new elections. Permanent 100% bonus depreciation, restored R&D expensing, and new reporting thresholds create additional tax elections that must be properly documented. Errors or overly aggressive positions increase IRS audit risk.
  2. Data matching and reporting shifts. Restored 1099-K thresholds and updated IRS reporting increase the risk of mismatches between third-party data and tax returns, a common trigger for IRS audits.

TOP IRS AUDIT RED FLAGS (AND HOW TO AVOID THEM) IN TAX SEASON 2026

1. Poorly documented Section 179/Bonus Depreciation claims: Full bonus depreciation (and higher Section 179 limits) can sharply reduce taxable income in year one. States that decouple may require add‑backs, and the IRS will want proof that the property qualifies and the basis is correct. Aggressive classification (personal vs. business use, listed property) draws attention.

    How to avoid:

    • Keep asset-level purchase invoices, delivery/installation records, and capitalization policies. 
    • Document business purpose and placed‑in‑service dates. 
    • If you operate in a state that decouples from bonus depreciation, model the required state addbacks and clearly document them in the tax workpapers.

    2. Schedule C (sole proprietor) returns with repeated losses or excessive expenses: Schedule C filings historically attract IRS audits. Repeated losses year after year or unusually large deductions (meals, travel, contractor labor, home office) can trigger a closer look for hobby‑loss rules or misstated business activity.

    How to avoid: 

    • Maintain a profit plan, time logs, sales records, and marketing documentation showing a profit motive. 
    • Keep receipts and contemporaneous logs for meals, mileage, and home office expenses. The IRS expects reliable records. See “Audits & Records Requests” for exactly what auditors ask for.

    3. Mismatches on third‑party reporting (1099‑K, 1099‑NEC, W‑2s): The IRS cross‑checks Forms W‑2/1099 against filed returns. If the gross receipts you report differ materially from what payers sent, the return becomes a prime candidate for examination. The 2025 Fact Sheet on Form 1099‑K clarifies reporting rules — but taxpayers still commonly underreport gross receipts or omit deductible offsets.

    How to avoid: Reconcile all 1099s to bank statements and accounting records before filing. Do not assume missing 1099s mean income is non-taxable; the IRS treats all income as taxable unless excluded by law. File an amended return promptly if errors are identified.

    4. Aggressive or unsupported R&D credit claims / large credits with weak substantiation: R&D credits remain attractive but complex. Large or recurring claims without solid project documentation, time studies, and cost support can trigger audits, especially after the 2025 changes to R&D expensing rules.

    How to avoid: 

    • Use project files, payroll records, invoices, lab notebooks, and technical summaries. If you claim credit, prepare a concise technical memo showing qualified activities and the costs allocated. Consider a pre‑filing R&D documentation review.

    5. High charitable deductions, noncash gifts, or appraisal issues: Large charitable deductions, especially for noncash property requiring Form 8283 or appraisals, draw automated screening. The IRS looks for valuation inconsistencies.

    How to avoid: Keep donation receipts, contemporaneous records, and qualified appraisals when required. If you claim a deduction for a vehicle or large property donation, follow Form 8283 and appraisal rules meticulously.

    6. Misuse of credits aimed at individuals (EITC, Child Tax Credit, adoption credit): Refundable credits attract scrutiny because they increase refund exposure. Incomplete eligibility (residency, support tests, AGI thresholds) can prompt automated checks and audits. The IRS recently adjusted many thresholds and credit amounts — know the updated rules.

    How to avoid: Keep documents proving eligibility (birth certificates, custody agreements, school records, proof of residency). When in doubt, consult guidance on the specific credit and error on the side of conservative claims.

    7. Large or unusual business interest expense or international tax positions: Changes to interest expense limits, GILTI/NCTI rules, and international tax provisions require careful calculation. Complex positions without proper transfer pricing support or documentation increase IRS audit risk.

    How to avoid: Maintain transfer pricing studies, contemplate documentation, and a qualified international tax memo. Run sensitivity analyses for different audit outcomes.

    WHY WORKING WITH A TAX PROFESSIONAL MATTERS NOW?

    The 2025 tax law made many valuable benefits available — but with added complexity that raises IRS audit risk if records are weak or taxpayers are careless.

    Tax professionals provide:

    • proactive tax planning around bonus depreciation and Section 179 elections.
    • R&D documentation and credit substantiation. 
    • federal vs. state conformity modeling to avoid surprise state tax bills.
    • audit defense and representation if needed.

    IRS Audit Group can help you review returns before filing, prepare organized work papers, and represent you during any IRS contact. For operational clients, we also provide staff training on audit‑ready recordkeeping.

    IRS AUDIT GROUP

    IRS Audit Group consists of tax professionals, CPAs, enrolled agents, and tax attorneys.  We are located in Los Angeles, California and our primary area of expertise is IRS Tax Audit Representation.  However, our certified professionals cooperate and work with all IRS offices nationwide.  Please get in touch with us for more information.

    Telephone Number: (310) 498-7508

    info@irs-audit-group.com

    Contact

    KEY OFFICIAL RESOURCES