The IRS cannot audit every return. They use statistical models, data matching, and automated screening to identify returns with the highest probability of unreported income. Cryptocurrency activity triggers several specific red flags that increase your audit risk substantially.

Checking "No" on the Digital Asset Question

The digital asset question on page one of Form 1040 asks whether you received, sold, exchanged, or otherwise disposed of any digital assets during the year. If you check "no" but the IRS has exchange data showing you had transactions, the discrepancy is automatically flagged. This is the single highest-risk action a crypto taxpayer can take.

Large Capital Gains Without Cost Basis

Reporting large crypto sales on Form 8949 with zero or minimal cost basis suggests that either you actually have no basis (unlikely for most investors) or you failed to track it. The IRS may examine whether the basis is accurate, which opens up your entire crypto transaction history to scrutiny.

Information Return Mismatch

When your exchange issues a 1099-B or 1099-MISC and the amounts do not match what you reported on your return, the IRS's Automated Underreporter program (AUR) generates a CP2000 notice. This is not technically an audit — it is an automated adjustment — but it has the same practical effect of requiring you to explain the discrepancy.

High Gross Proceeds with Low or No Tax

Returns showing hundreds of thousands in crypto gross proceeds but little or no net tax liability draw attention. While losses, high cost basis, and other factors can legitimately produce this result, the pattern matches what the IRS sees in non-reporting cases. Documentation supporting your basis and loss claims is essential.

Reducing Audit Risk

Accurate reporting is the only reliable way to reduce audit risk. Answering the digital asset question honestly, reporting all transactions with correct basis, reconciling to exchange-issued information returns, and maintaining documentation eliminates the most common triggers. If you are already under examination, Attorney Darrin T. Mish handles crypto audits with 32 years of IRS experience. Free consultation.