Now that tax season is over, you may be breathing a sigh of relief. However, once your return is filed (or before your return is filed on extension), it’s key to be prepared in case you receive an audit notice from the IRS.

If you have already filed your freelance taxes, beware that there are a number of red flags described below that may sometimes draw scrutiny from the IRS.  If you have yet to file because you were granted an extension on your tax filing, review this list so you can proactively avoid any of the audit triggers below. 

While being audited isn’t necessarily a sign of wrongdoing, it’s a stressful and time-consuming process that is best avoided. If you do run into an audit request due to these or other issues, consult with a tax professional who can help you respond appropriately to the IRS.

Claiming excessive deductions.

The IRS fully expects freelancers to take advantage of deductions to lower their taxable income but claiming excessive deductions or ones that don’t add up can be a red flag. This is especially true for service businesses if you did not hire third parties or issue 1099s because high levels of income may cause greater scrutiny.

It’s best to stick to deductions that are directly related to your work, such as office supplies, business-related travel, and legitimate client meals. Be reasonable and ensure that all deductions are documented backed up by receipts and documentation to mitigate as much of your audit risks as possible. 

If you work from home, the home office deduction can be especially beneficial, but it must meet the IRS’s strict requirements. Your home office must be exclusively used for business purposes and not double as a personal space (e.g., your dining room). Keep detailed records, including photos, to demonstrate the legitimacy of your claim.

Underreporting income

One of the most common mistakes freelancers make is underreporting their income, whether intentionally or accidentally. The IRS receives income information from third-party sources such as clients who issue Form 1099-NEC or other relevant tax documents. If the income you report doesn’t match the information the IRS has, it could trigger an audit. 

To avoid this, ensure you carefully track all income throughout the year. Keep digital or physical copies of all Form 1099s you receive and compare them to your own records. If you receive income that isn’t reported on a 1099, you’re still required to report it on your tax return.

Mixing personal and business expenses

As a freelancer, it’s crucial to separate your personal expenses from your business ones. Using your business account for personal spending—or vice versa—is an easy way to create confusion and draw IRS attention. For instance, claiming a lavish family vacation as a “business trip” is likely to be flagged during an audit.

To maintain clarity, establish separate bank accounts and credit cards for your business. This makes it easier to identify legitimate business expenses and ensures that you aren’t inadvertently claiming personal costs. Accurate bookkeeping is your best defense here—maintain organized records and categorize expenses correctly.

Using rounded numbers

Filing a tax return with perfectly rounded numbers can also raise suspicion. For example, reporting $5,000 for advertising expenses and $10,000 for equipment costs suggests you’re estimating rather than using actual figures. The safer option is to file precise amounts based on documented expenses and receipts.

Accurate reporting demonstrates diligence and reduces the chances of discrepancies that could lead to an audit.

Reporting net losses year after year

As a freelancer, you are allowed to deduct legitimate business expenses, but consistently reporting losses over several years could indicate to the IRS that your business is not a profit-driven enterprise. If you’re claiming a business loss year after year, the IRS may question whether your freelancing is truly a business or a hobby.

The solution? Document how you’re actively working to turn your business into a profitable endeavor. Keep records of marketing campaigns, client acquisition efforts, and investments you’ve made in growing your work. A clear business plan also demonstrates your commitment to generating income.

Overusing vehicle deductions

Many freelancers claim deductions for vehicles they use for business purposes. While this is perfectly fine, claiming 100% of your vehicle use as business-related—even if it’s also your family car—can raise suspicion. 

If you’re using a car for both personal and business reasons, keep detailed mileage logs. Document the date, purpose of the trip, and miles driven. The IRS accepts well-maintained mileage records as evidence for deductions.

Missing forms or incorrect filings

Simple mistakes like missing a form or filing with incorrect information can lead to scrutiny. Errors in Social Security numbers, names, or business classifications on forms such as your 1099s can trigger the IRSto take a closer look at your entire return. Take the time to review your return thoroughly before submitting it to make sure it as accurate as possible. This can help catch errors and ensure proper filing.

High income

It’s no secret that high earners are more likely to be audited, regardless of whether they’re freelancers or salaried employees. If your freelancing income is substantial, you may be subject to heightened scrutiny.

While you can’t control your income level, you can minimize audit risks by ensuring your tax return is flawless. Document your income thoroughly, keep receipts for expenses, and file accurately. Consider working with a tax professional to double-check your return if you’re in a higher income bracket.

Final Thoughts

As a freelancer, avoiding audit red flags boils down to accurate reporting, detailed record-keeping, and reasonable claims. Take time throughout the year to maintain organized financial records so tax season doesn’t become a scramble. If possible, consult a tax professional who understands the unique challenges freelancers face to help you develop a proactive approach to tax filing that can save you from unnecessary stress and help you focus on what truly matters—your work.