As a small business owner, there’s nothing scarier than an IRS audit. IRS audits can be costly and time-consuming. Knowing what triggers an audit is the first proactive step preventing them from happening.
In this guide, we’ll explore the 5 common audit triggers so that you can avoid making an inadvertent mistake that lands you in hot water.
What Are IRS Audits?
An IRS audit is a formal review of your tax information and accounts conducted by the Internal Revenue Service (IRS). The IRS may conduct an audit to ensure you correctly reported your income, deductions, and credits on your tax return, or because they’ve identified a discrepancy in your tax return, or because they suspect underreporting.
There are 3 ways audits are conducted:
- Correspondence audit: Conducted through mail correspondence, requesting additional documentation or clarification on specific items.
- Office audit: Requires you to visit an IRS office for an in-person interview review of your records.
- Field audit: An IRS agent visits your home or business to examine your records and ask questions.
In some cases, returns are randomly selected for audits. In other cases, something in your filing raises a red flag that prompts investigation.
Top 5 IRS Red Flags
As you take the necessary steps to file your tax return and report your taxable income it's important also to consider what might trigger an IRS audit.
While it's impossible to guarantee that you won't be audited, working with a trusted tax professional at LedgerFi can help minimize your risk of any of the following top IRS audit triggers.
But being knowledgeable of the possible IRS audit triggers is helpful for a taxpayer who has attempted to report legitimate deductions and business purpose transactions. Below you will find the top 5 IRS audit triggers:
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Unreported Income: Failure to Report All Sources of Income

It's essential to report all sources of taxable income to the IRS. Unreported income could trigger an audit. This is especially true for self-employed entrepreneurs. If you are an Independent Contractor that files self-employment tax, wait until you receive your 1099.
Failure to report all your income could lead to serious financial consequences, including penalties and interest. It's crucial to keep proper documentation of all your income, including any gig jobs and freelance work.
The IRS has specific audit triggers, and unreported or estimated income is one of the So, be sure to report all your taxable income to avoid a potential audit and any associated penalties.
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Excessive Business Deductions: Claim Legitimate Deductions

When it comes to tax season, it's crucial that you accurately report your income and only claim what your business is entitled to. Excessive deductions such as personal expenses reported as business deductions and excessive meal and travel expenses may trigger an audit.
A business is allowed to deduct any expense that is directly related to the production of income, regardless of whether it is an ordinary deduction or not. So, keep detailed records of your business expenses.
Legitimate deductions for a service business may be the purchase of new equipment, vendor vehicle expenses, home office deduction, charitable deductions (only C-Corps), and more. However, C-Corps and S-Corps (and their owners) can not claim home office deductions. Additionally, if the business has a physical location outside of the owner’s home the deduction also can not be claimed.
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Inaccurate Documents: Double Check All Documents for Accuracy

When it comes to submitting official documents, accuracy is key. Even seemingly minor mistakes, such as math errors, can lead to major issues down the line.
That's why it's important to double-check all documentation before filing or submitting it. Ensure everything is correctly filled out, and any necessary supporting documents are included.
Not only will this help avoid potential IRS audit triggers, but it will also give you peace of mind knowing that you've done everything you can to ensure the accuracy of your paperwork.
The Internal Revenue Service has reported that many taxpayers who receive tax audit notifications were randomly selected. According to the Internal Revenue Service, a t return may be selected by a statistical formula or compared to another tax return.
They also warn that if you have business partners, this may trigger an audit if you and your partners are reporting different taxable income, such as dividends.
Take the time to review your documents thoroughly, and you can avoid headaches and potential problems down the line.
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Poor Record Keeping: Maintain Accurate and Up-to-Date Records of All transactions

Maintaining accurate and up-to-date records of all transactions is crucial for both personal finance and business purpose
Poor record-keeping can result in missed itemized deductions and tax credits. To avoid such a situation, the IRS advises keeping your financial records for seven years. This is especially important if you have filed a claim for a loss of worthless securities bad debt.
Moreover, in case of an audit, incomplete or inaccurate records could pose a significant challenge when further scrutiny and review of your records are requested by the IRS. You should keep documentation for business expenses deducted, as well as record for any itemized deductions and/or tax credits.
Making sure you’re reporting all sources of income accurately, not exaggerating on deductions, and double-checking transactions for accuracy before submitting your tax return is recommended.
Keeping track of all financial transactions also enables you to have accurate data analytics of your business expenses.
Use data analytics tools to streamline your tax records and ensure that you are keeping records with precision. Using a bookkeeping software like QuickBooks can keep your financial records ready and available if your large transactions trigger an audit.
Remember that sound financial management starts with accurate and meticulous records.
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Large Income Fluctuations

Reporting a high income to the IRS can trigger an audit. If you report a larger income as a taxpayer than you have in previous tax years, it is important to be aware that your tax return may be subject to closer examination.
The IRS is known for its strict monitoring of tax returns which shows a drastic difference in income from previous tax returns. Your expenses, deductions, and large cash transactions may be legitimate.
It is crucial for the IRS to ensure that your tax records are accurate and up-to-date. Additionally, if you claim any excessive deductions, you may be under even further scrutiny.
Make sure to go through all your tax records and double-check your deductions by comparing them to receipts and transactions to ensure they are accurate.
How do You Avoid Triggering an Audit?
Because there is a small possibility your business can be chosen for a tax audit at random, avoiding an IRS audit requires being as accurate and math error free as possible.
Personal finance begins with your own record-keeping. Make sure that every purchase and outcome is tracked accurately. Keep an eye on excessive deductions and be aware of what’s being reported on your Schedule C form.
However, there are a few businesses that may be more at risk than others, such as:
- Partnerships or return is linked with another taxpayer
- High-income earners
- Unusual deductions claimed
- Tax Shelters and investment income
With proper attention to detail, you can avoid a headache with the IRS. As a small business owner, it is critical to be aware of these risk factors and take steps to minimize the chance of being audited.
This may include ensuring that all deductions claimed are legitimate and ensuring that taxes are filed accurately and on time. By being proactive and vigilant, you may be ab to avoid the stress and expense of an audit.
If your business ever receives that dreaded notification that the IRS is auditing yo records, a list of records will be requested. In many cases, audits are conducted through a correspondence audit.
A correspondence audit does not require you to go to the IRS office physically, and your office won't be visited by a field tax auditor.
But often, if it’s been determined a math error occurred and your business owes more money, a stroke of a pen or click of a button to pay the tax bill may be the result of the audit.
Knowing how to avoid an IRS audit is key to running a successful business and reduces stress. By being aware of the potential red flags associated with audits, you can p safeguards in place to reduce your risk of getting one.
Schedule an Appointment Today
You are now knowledgeable about IRS audit triggers, what they are, and how to avoid them. No one wants to go through an audit, and you can take the necessary steps to avoid the IRS picking your tax returns for review.
Good record-keeping habits with all transactions and filing taxes based on report income are necessary for staying away from the scrutiny of an audit.
Being prepared and understanding the system are the best ways to survive what can be a daunting process. LedgerFi specializes in providing outstanding accounting services to small businesses.
Our services help clients navigate through complex tax situations while they focus on their business operations. Schedule an appointment today to get help strategizing the best approach for filing taxes without triggering an IRS audit.