Even honest business owners can attract unwanted IRS attention. Every year, the IRS uses data analytics and compliance algorithms to flag returns with potential discrepancies or red flags. Understanding these IRS audit triggers helps you file accurately and minimize the chance of a costly audit.
What are potential IRS audit triggers?
1. Large Deductions Compared to Income
If your deductions appear disproportionately high compared to your reported income, it raises suspicion.
- Tip: Maintain thorough documentation (receipts, mileage logs, invoices).
IRS Publication 463 details which travel, gift, and car expenses qualify.
2. Excessive Cash Transactions
Businesses that handle large amounts of cash — restaurants, salons, contractors — are at higher audit risk. The IRS receives Form 8300 reports for cash transactions over $10,000. If reported amounts don’t match your income declarations, it can trigger review.
See IRS Form 8300 compliance page for details.
3. Home Office Deductions Without Proof
While legitimate home office deductions are allowed, claiming a large or unrealistic portion of your home for business use can be problematic.
- Must be regular and exclusive use for business.
- Keep floor plans or photos showing the dedicated workspace.
See IRS Publication 587 for eligibility rules.
4. Mismatched Income Reports (W-2s and 1099s)
When income reported by third parties doesn’t match your tax return, the Automated Underreporter (AUR) system issues alerts.
- Always reconcile your 1099s, W-2s, and bank records before filing.
- Keep digital copies of all income statements.
5. Claiming 100% Business Use of a Vehicle
Claiming that a car is used 100% for business is a classic red flag. The IRS expects some personal use unless the vehicle is specialized (like a delivery truck).
- Keep a detailed mileage log.
- Report business and personal use percentages accurately.
IRS Publication 463 also covers vehicle deductions.
6. Reporting Continuous Business Losses
If your business reports losses year after year, the IRS may question whether it’s a legitimate business or a hobby. Under the “hobby loss rule,” the IRS expects a profit in 3 of 5 consecutive years.
Refer to IRS Hobby Loss Rules for official guidance.
7. High Income Without Withholding or Estimated Payments
High earners who don’t make quarterly estimated tax payments often trigger scrutiny. Failing to pay self-employment or estimated taxes on time can signal noncompliance.
See IRS Estimated Taxes to calculate proper payment amounts.
8. Rounded Numbers and Missing Records
Returns that contain rounded numbers (e.g., $10,000 instead of $10,173) can indicate guessing rather than documentation. Be precise — even small inconsistencies may invite review.
9. Deducting Personal Expenses as Business Costs
Mixing personal and business expenses — like vacations, family meals, or clothing — is a serious audit trigger. Keep separate accounts and track business expenses with proper receipts.
10. Claiming Uncommon or Complex Credits
Unusual or high-value credits — such as the R&D tax credit, energy efficiency credits, or employee retention credits (ERC) — may draw IRS attention if improperly claimed. Consult a qualified tax advisor before filing.
How to Reduce Your IRS Audit Risk?
- File accurately and on time.
- Keep organized records.
- Use consistent reporting between federal, state, and payroll filings.
- Seek professional review for complex returns.
A tax attorney can also help review your records before filing, identify risk areas, and represent you if an audit arises.
Get the Legal Help You Deserve
IRS audits can happen to anyone, but understanding what triggers them allows you to prepare and protect your business. With professional guidance, you can file confidently — and respond strategically if the IRS calls.
If you’ve received an audit notice or want to prevent one, contact Pelham PLLC today. Our tax attorneys help small businesses maintain compliance, handle audits, and negotiate directly with the IRS.
FAQs
What increases your chances of being audited by the IRS?
Large deductions, mismatched income reports, or unusual business losses are common IRS audit triggers.
Does the IRS audit small businesses often?
Small businesses have higher audit exposure due to self-reporting and potential record-keeping errors.
What happens if you get audited and owe more tax?
The IRS will propose additional tax, penalties, and interest. You can pay, dispute, or appeal through the IRS Independent Office of Appeals.
Can a tax attorney help prevent or handle an IRS audit?
Yes. A tax attorney can review your filings, identify risks, respond to audit requests, and negotiate with the IRS on your behalf.
