The clearest way to know if your tax return has been flagged is an official letter from the IRS delivered by mail. Before that letter arrives, though, two earlier signals often give it away: a refund that stalls past the normal three-week window for e-filed returns, and specific transaction codes on your IRS account transcript. The IRS makes first contact by mail, not by phone, email, or text, so any call or message demanding immediate payment is a scam and not evidence of a flag.1Internal Revenue Service. How to Know Its the IRS
Most flagged returns weren’t flagged because someone did anything wrong. Every return runs through a computer scoring system called the Discriminant Information Function (DIF), which assigns a score based on how the figures compare to statistical norms for taxpayers with similar income, filing status, and deductions. A high score means the system thinks a review would probably change the tax owed. It does not mean the IRS thinks you cheated. Fewer than two out of every thousand individual returns face examination in a given year, so even an elevated score usually doesn’t result in contact.
A Delayed Refund as the First Signal
The IRS typically issues refunds within three weeks for electronically filed returns. A delay past that window can mean a manual review is underway.2Internal Revenue Service. Refunds But not every delay is a flag. Common innocent causes include math errors, missing signatures, and claims for the Earned Income Tax Credit or Additional Child Tax Credit, which by law cannot be refunded before mid-February regardless of when you filed.3Internal Revenue Service. When to Expect Your Refund if You Claimed the Earned Income Tax Credit or Additional Child Tax Credit
If your refund is late and you want a real answer instead of the vague status bar in the “Where’s My Refund” tool, the account transcript is where you look next.
What Your IRS Account Transcript Reveals
Pull your account transcript through the IRS Individual Online Account at IRS.gov.4Internal Revenue Service. Get Your Tax Records and Transcripts The transcript uses three-digit Transaction Codes that show exactly what’s happening behind the scenes. Three codes tell you something is up:
- TC 570 places a hold on your account for additional review. It often shows a zero dollar amount, and your refund stays frozen until the issue is resolved.
- TC 971 usually follows TC 570 and means the IRS has mailed you a notice explaining the hold. If you see it, expect a letter within a couple of weeks.
- TC 420 is the more serious indicator. It means your return has been referred to the examination division for audit.5Internal Revenue Service. Section 8A Master File Codes – Transaction, MF and IDRS
If TC 420 shows up on your transcript, don’t wait for the letter. Start gathering records now.
Identity Verification Letters
Not every flag questions your numbers. Sometimes the flag is about whether you actually filed the return. The IRS runs identity verification checks to catch fraudulent returns filed with stolen Social Security numbers, and if your return trips one of those filters, processing stops until you prove who you are.
You’ll receive either a Letter 5071C (part of the CP5071 series) or a Letter 4883C, both asking you to verify your identity before the IRS will continue processing.6Internal Revenue Service. Understanding Your CP5071 Series Notice If you did file the return, verify online at irs.gov/verifyreturn or by phone using the instructions on the letter. If you did not file the return, contact the IRS immediately — someone may have filed in your name.7Internal Revenue Service. Understanding Your Letter 4883C Until you respond, the IRS won’t process the return, issue a refund, or credit any overpayment. After successful verification, expect up to nine weeks for your refund.
The Mailed Notices That Confirm a Flag
An official letter is the definitive confirmation. The letter number in the top corner tells you what kind of flag you’re dealing with and how serious it is.
CP2000: Income Mismatch
The most common flag isn’t technically an audit. A CP2000 notice means the IRS’s automated system found that the income you reported doesn’t match what employers, banks, or brokerages reported through W-2s and 1099s.8Internal Revenue Service. Topic No 652, Notice of Underreported Income – CP2000 The notice proposes an adjustment and tells you what the IRS thinks you owe. It’s a proposal, not a bill. You have 30 days to agree, partially agree, or dispute the changes with documentation.9Internal Revenue Service. Understanding Your CP2000 Series Notice
These notices often catch freelancers who forgot a 1099, investors who reported the wrong cost basis on a stock sale, or people who withdrew retirement funds without realizing the distribution was reported to the IRS. If the IRS is right, agreeing and paying the difference (plus interest) is usually the cheapest path. If the IRS is wrong, responding with clear documentation usually resolves it.
The 30-Day Letter
A 30-day letter means the IRS has actually examined your return and is proposing specific changes. The letter spells out what the examiner found and gives you 30 days to agree, provide additional documentation, or request a conference with the IRS Independent Office of Appeals.10Taxpayer Advocate Service. Letter 525 Audit Report/Letter Giving Taxpayer 30 Days to Respond
The 90-Day Letter (Notice of Deficiency)
If you don’t respond to the 30-day letter, the IRS issues a Notice of Deficiency, known as the 90-day letter. This is a legal notice that gives you exactly 90 days (150 days if you’re outside the United States) to petition the U.S. Tax Court. Miss that deadline and you lose your right to challenge the amount in court before paying it. Most people who get into serious trouble did so not because the IRS found something devastating, but because they ignored an earlier letter and ran out of time to dispute.
What Kind of Audit to Expect
If the letter is an examination notice, it also tells you the format:
- A correspondence audit is handled entirely by mail. The IRS asks for documentation supporting specific line items. This is the most common type and usually the least invasive.
- An office audit asks you to bring records to a local IRS office for an in-person review of specific items.
- A field audit sends an IRS agent to your home or business to review records on-site. Field audits tend to be broader and involve higher-income returns or business activity.
What Actually Triggered the Flag
Knowing why the system flagged the return helps you guess what documentation the IRS will want. A few triggers account for most notices.
Third-Party Income Mismatches
Every W-2, 1099-INT, 1099-NEC, 1099-B, and similar form filed by an employer, bank, or brokerage also goes to the IRS. The automated system cross-references these against your return, and any gap generates a flag.8Internal Revenue Service. Topic No 652, Notice of Underreported Income – CP2000 There’s no judgment involved. A missing $200 1099-INT from a savings account trips the same alarm as a missing $50,000 1099-NEC.
Deductions Outside the Statistical Norm
The DIF system compares your deductions to returns from taxpayers with similar incomes. Charitable contributions that are disproportionately large relative to income, significant medical expense deductions, and home office claims on Schedule C are perennial flags. The IRS isn’t saying those deductions are wrong, only that they sit outside the statistical norm and are worth verifying.
Repeated Business Losses
Reporting losses from a side business on Schedule C year after year raises a specific question: is this a real business or a hobby? Under the hobby loss rule, the IRS presumes an activity is for profit if it generated a profit in at least three of the last five tax years.11Office of the Law Revision Counsel. 26 US Code 183 – Activities Not Engaged in for Profit Fall below that threshold and the IRS can reclassify the activity and disallow the losses you used to offset other income. Activities that look like personal hobbies (photography, horse breeding, craft sales) draw extra attention when they consistently produce losses.
Digital Assets
Every Form 1040 includes a yes-or-no question asking whether you received, sold, or exchanged any digital assets during the year.12Internal Revenue Service. Digital Assets Starting with transactions after 2025, U.S. crypto exchanges must issue Form 1099-DA reporting gross proceeds, with cost basis reporting added for assets acquired after January 1, 2026.13Internal Revenue Service. 2026 Instructions for Form 1099-DA Answering “no” when the IRS holds a 1099-DA with your name on it creates an immediate mismatch flag. Cost basis is another risk: if an exchange reports basis as “unknown” or zero, the IRS defaults to treating the entire sale price as profit.
Foreign Accounts
If the combined value of your foreign financial accounts exceeds $10,000 at any point during the year, you must file FinCEN Form 114 (the FBAR).14Financial Crimes Enforcement Network. Report Foreign Bank and Financial Accounts Higher-value holdings may also require Form 8938. Failure to file carries penalties up to $10,000 per violation for non-willful Form 8938 failures, and potentially far more for willful failures on either form.15Internal Revenue Service. Comparison of Form 8938 and FBAR Requirements
What to Do Once You See a Flag
Read the Letter First
Every IRS notice includes a letter number (CP2000, Letter 525, Letter 531) and a response deadline. That deadline matters more than almost anything else. Missing it can forfeit your right to dispute through normal administrative channels, and in the case of a 90-day letter, your right to petition Tax Court without paying first.
Gather Documentation
Pull together records for every item the IRS is questioning. For business expenses, that means receipts, invoices, bank statements, and anything connecting the expense to the business. For itemized deductions, it might mean appraisal reports for donated property or detailed medical billing records. Send copies only. The IRS does not return originals.16Internal Revenue Service. Audit Reconsideration Process for Correspondence Examination Audits by Mail
Respond in a Way You Can Prove
For correspondence audits, submit documents through the IRS Document Upload Tool at irs.gov/examreply, or mail them. If mailing, use certified mail with return receipt so you have proof of delivery before the deadline. A response that arrives one day late is treated as no response.
Get Help If the Scope Justifies It
You have the right to appoint a CPA, enrolled agent, or tax attorney to handle communication with the IRS on your behalf, by filing Form 2848, Power of Attorney.17Internal Revenue Service. Power of Attorney and Other Authorizations A straightforward CP2000 mismatch you can often handle yourself. A field audit or anything involving complex business income is worth professional help.
Know Your Rights
The Taxpayer Bill of Rights guarantees the right to know why the IRS is requesting information, the right to appeal any IRS decision to an independent forum, the right to retain a representative, and the right to expect that the examination will be no more intrusive than necessary.18Internal Revenue Service. Taxpayer Bill of Rights If an examiner is overreaching or a dispute isn’t resolving through normal channels, the Taxpayer Advocate Service can step in.