Your bank statement tells a story, and the IRS reads every chapter. Most people think they can fly under the radar if they don’t make millions or claim outrageous deductions, but the government’s computers are scanning for patterns that don’t add up. One wrong move and you’re explaining yourself in an audit. These are the red flags that put you on their radar.
1. Cash Deposits Over $10,000
Banks are legally required to file Currency Transaction Reports with the IRS for any cash deposit of $10,000 or more. According to federal regulations under the Bank Secrecy Act, these reports go straight to the Financial Crimes Enforcement Network. The report includes your name, Social Security number, and details about where the money came from. Even if the cash is completely legitimate, you’re now in a database.
The reporting threshold exists to track money laundering and illegal activity, but it catches everyone. If you sold a car for $12,000 in cash or got paid for a big project, that deposit triggers a report within 15 days. The IRS doesn’t assume you’re guilty, but they now have documentation of a large cash movement tied to your name.
2. Multiple Deposits Just Under $10,000
Breaking up large cash amounts into smaller deposits to avoid the $10,000 threshold is called structuring, and it’s a federal crime. Research from the IRS Criminal Investigation Division shows they use advanced data analytics specifically to detect patterns of deposits designed to evade reporting. Even if your money is 100% legal, structuring it makes you look guilty and can result in imprisonment for up to five years and fines up to $250,000.
If you deposit $9,500 today and $9,500 tomorrow, the bank’s system flags it automatically. They’re trained to spot this pattern, and they file Suspicious Activity Reports even faster than they’d file a standard cash report. Structuring is actually worse than just depositing the full amount at once.
3. Income That Doesn’t Match Third-Party Reports
Every Form 1099 and W-2 sent to you also goes to the IRS. Their computers automatically compare what you report to what businesses reported paying you. Banks, brokerage firms, payment processors, and gig economy apps all send income documentation. If there’s a mismatch between what they say they paid you and what you claim you earned, you’re flagged.
This includes forgotten bank accounts earning interest, side hustles paid through Venmo or PayPal, freelance work, and investment dividends. The IRS receives these forms before you even file your taxes. If your numbers don’t line up, their system catches it immediately.
4. Large Round-Number Transactions
IRS computers flag returns with too many round numbers because they suggest estimation instead of actual record-keeping. According to research published in tax compliance journals, reporting exactly $5,000 for advertising, $10,000 for travel, and $20,000 for supplies looks like you didn’t track receipts. Real expenses rarely come out to neat thousands.
The algorithm scans for patterns that indicate you’re guessing at numbers rather than documenting them. If your business expenses are consistently rounded to the nearest hundred or thousand, it triggers a review. Actual receipts show amounts like $4,847.23 or $9,612.88.
5. Sudden Spikes Or Drops In Reported Income
A dramatic income change from one year to the next stands out to the IRS, especially if it’s unexplained. If you made $75,000 last year and $45,000 this year, or suddenly jumped from $60,000 to $150,000, their systems want to know why. Large discrepancies suggest either unreported earnings or improper deductions.
Legitimate reasons exist for income swings—layoffs, successful product launches, and major business pivots. But without clear documentation explaining the change, you’re under extra scrutiny. The IRS compares your current return to your history and flags statistical outliers.
6. Deposits From Payment Processors Like Venmo Or PayPal
With expanded 1099-K reporting requirements in effect, the IRS now tracks digital payments more closely than ever. According to research from Armstrong Tax & Advisory analyzing 2025 audit trends, payment processors report transactions to the IRS when they exceed certain thresholds. If you received payments through Square, Venmo, PayPal, or similar platforms and those amounts don’t show up on your tax return, there’s a mismatch.
The IRS knows exactly how much money moved through your payment apps because the platforms report it. If you claim you made $30,000 but PayPal reported paying you $45,000, you’re explaining the $15,000 difference. Side hustles, freelance work, and small business income all get tracked.
7. Business Expenses That Exceed Gross Receipts
When your business shows expenses approaching or exceeding your revenue, the IRS assumes something’s wrong. Either you’re hiding income, inflating expenses, or running a hobby disguised as a business. The agency looks for businesses reporting losses year after year because tax law typically requires three profitable years out of five.
If your business consistently loses money, they question whether it’s legitimate. Claiming $50,000 in expenses against $45,000 in revenue year after year looks suspicious. Genuine businesses eventually turn profits, or they shut down.
8. Foreign Bank Accounts You Haven’t Disclosed
Having money stashed overseas requires specific reporting. If foreign accounts exceed $10,000 in aggregate value at any time during the year, you must electronically file FinCEN Form 114. Foreign banks now report American account holders directly to the IRS under international agreements. If they report your account and you didn’t disclose it, you’re caught.
The penalties for unreported foreign accounts are severe—potentially five years in prison and significant fines. The IRS pays special attention to countries considered tax havens. Even if the account is completely legal, failing to report it puts you at serious risk.
9. Disproportionately Large Charitable Donations
Claiming charitable deductions that are huge compared to your income raises immediate questions. If you earned $40,000 and donated $20,000, the IRS wants proof. They have data showing average charitable giving by income level. When you’re significantly above average for your bracket, they ask for receipts, acknowledgment letters from the organizations, and appraisals for non-cash items worth over $5,000.
The IRS knows how much people at your income level typically give. If you’re claiming double or triple that amount, you’re getting extra scrutiny. The deduction might be legitimate, but you’ll need ironclad documentation to prove it.
10. Excessive Business Meal And Travel Expenses
The IRS compares your meal, travel, and entertainment deductions to industry norms. If you’re claiming 20% more than the average for your business type, it triggers a flag. These expenses come with strict substantiation rules—you need dates, locations, business purposes, and names of people involved. Trying to write off personal vacations as business trips is a common audit trigger.
Home office deductions also get scrutinized heavily. The space must be used exclusively and regularly for business. If you claim 40% of your household expenses as business use, that’s questionable for most people. A more realistic home office percentage is closer to 10%.
11. Vehicle Expenses Claimed At 100% Business Use
Claiming that a car is used entirely for business purposes almost never holds up. The IRS knows most people drive their vehicles for personal errands, family trips, and commuting. If you claim 100% business use, you’re inviting an audit. They want mileage logs, dates, destinations, and business purposes for every trip.
Most business owners don’t use vehicles strictly for work. If your business expense deductions show you drove 40,000 miles for work, but you live 15 miles from the office, the math doesn’t add up.
12. Frequent Large Cash Withdrawals
Regular large cash withdrawals can indicate unreported business income or attempts to hide money. If you’re taking out $8,000 in cash every few weeks, the bank notices the pattern. While withdrawals under $10,000 don’t trigger automatic reports, suspicious patterns do. Banks file Suspicious Activity Reports for behavior that seems designed to evade detection.
Cash-heavy businesses face extra scrutiny because it’s easier to underreport income when there’s no paper trail. If your business deposits show revenue but your lifestyle suggests you’re spending more than you claim to earn, that gap gets investigated.
13. Cryptocurrency Transactions You Haven’t Reported
The IRS now specifically asks on your tax return whether you’ve bought or sold cryptocurrency. They treat crypto as property, meaning every sale or exchange creates a taxable event. If you’re trading, mining, or receiving payment in cryptocurrency, they expect complete documentation of every transaction. Exchanges report your activity directly to them via Form 1099-B.
If you check “no” to the cryptocurrency question but exchanges reported transactions under your name, you’re caught lying on your return. The IRS invested heavily in tracking digital assets. Blockchain transactions might feel anonymous, but exchanges know who you are.
14. Deposits That Don’t Match Your Reported Business Income
If your bank statement shows regular deposits totaling $100,000 but your tax return claims business income of $60,000, the IRS wants to know where the other $40,000 came from. They can request your bank statements during an audit and compare them line by line to your reported income. Large discrepancies between deposits and reported earnings are major red flags.
This catches people who run cash businesses and only report part of their income. If your deposits consistently exceed your reported revenue, you’re either hiding income or you have another source you haven’t explained. Either way, you’re answering questions under audit.
This article is for informational purposes only and should not be construed as financial advice. Consult a financial professional before making investment or other financial decisions. The author and publisher make no warranties of any kind.
