The 2026 filing season for tax year 2025 returns saw the IRS and Franchise Tax Board process millions of individual and business returns under the new provisions of the One Big Beautiful Bill Act (OBBBA). Post-filing examination activity and notice volumes revealed recurring patterns in both federal and California audits. These patterns generally stem from discrepancies between reported amounts and third-party data, aggressive deductions, or incomplete documentation. This publication reflects tax law and regulations applicable as of May 2026 and is subject to change without notice.
This article examines the most common IRS and FTB audit triggers observed during the 2026 filing season for tax year 2025 returns, documentation patterns associated with increased scrutiny, general strategies that may reduce examination risk, and official resources for further reference.
Most Common IRS Audit Triggers Observed in 2026
| Trigger | Common Pattern Observed | Typical Documentation Focus |
|---|---|---|
| OBBBA deductions (tips, overtime, car loan) | Claims lacking contemporaneous logs or W-2/1099 detail | Tip logs, employer statements, VIN/loan documents |
| Conservation easement and syndicated charitable contributions | Large noncash deductions relative to AGI | Qualified appraisal, Form 8283, partnership records |
| Schedule C business expenses | Expenses exceeding 50–60% of gross receipts | Receipts, mileage logs, home office allocation |
| Cryptocurrency transactions | Unreported or mismatched Form 1099-K/1099-B data | Wallet transaction history, cost basis records |
| High AGI with large itemized deductions | Itemized deductions exceeding 30% of AGI | Charitable acknowledgments, medical records |
Most Common FTB Audit Triggers Observed in 2026
California examinations frequently mirrored federal issues while adding state-specific conformity adjustments:
- PTE elective tax elections and June 15 initial payments under SB 132
- Failure to properly adjust for non-conforming OBBBA provisions (senior deduction, overtime pay, car loan interest)
- Real estate withholding discrepancies on Form 593
- Nonresident source income and residency determinations
The general statute of limitations for IRS and FTB audits is three years from the later of the return due date or filing date; this period extends to six years if gross income is understated by more than 25%. Proper contemporaneous records must be retained for at least the applicable statute period.
Strategies Observed to Reduce Examination Risk
Taxpayers who maintained organized, contemporaneous documentation and consistent reporting across federal and state returns generally experienced fewer automatic notices. Common practices included reconciling third-party information before filing, attaching explanatory statements for large or unusual items, and ensuring California conformity adjustments were clearly disclosed on Form 540.
Compliance Resources and Tools
Official IRS forms and instructions, including Publication 594 and Publication 5181 (both accessed May 25, 2026), are available on IRS.gov. The Franchise Tax Board provides Publication 4058 (accessed May 25, 2026) on its website.
- The 2026 filing season highlighted recurring IRS scrutiny of new OBBBA deductions when supporting documentation was incomplete.
- Schedule C expenses and noncash charitable contributions, particularly conservation easements, remained among the most common federal audit triggers.
- Cryptocurrency reporting mismatches and large itemized deductions relative to AGI frequently generated automated notices.
- FTB audits often centered on California-specific conformity adjustments and PTE elective tax compliance.
- Consistent third-party reconciliation and retention of contemporaneous records generally reduced the likelihood of examination.
- Official IRS and FTB publications continue to provide general guidance on audit selection criteria and response procedures.
References
- Internal Revenue Service. (2026). Publication 594: The IRS Collection Process. IRS.gov. Accessed May 25, 2026. https://www.irs.gov/publications/p594.
- Internal Revenue Service. (2026). Publication 5181: Tax Return Reviews by Mail. IRS.gov. Accessed May 25, 2026. https://www.irs.gov/publications/p5181.
- Internal Revenue Service. (2026). Topic No. 652 – Notice of Underreported Income. IRS.gov. Accessed May 25, 2026. https://www.irs.gov/taxtopics/tc652.
- Franchise Tax Board. (2026). Publication 4058: Collection and Enforcement. FTB.ca.gov. Accessed May 25, 2026. https://www.ftb.ca.gov/forms/2026/2026-4058.pdf.
- Franchise Tax Board. (2026). Audit Selection Criteria – FTB Notice 2026-04. FTB.ca.gov. Accessed May 25, 2026. https://www.ftb.ca.gov/about-ftb/audits/index.html.
The information contained in this publication is provided for educational and general informational purposes only. It does not constitute tax advice, accounting advice, legal advice, or any other form of professional advice and does not create a client-professional relationship.
The content reflects tax law and regulations applicable on the date of publication only and is subject to change without notice. Examples and illustrations are hypothetical and do not represent any specific taxpayer situation.
No reader should act or refrain from acting on the basis of this publication without first obtaining specific written advice from a licensed CPA based on the reader's individual facts and circumstances.
Any federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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