An IRS audit is every business owner’s nightmare. While most audits are triggered by computer algorithms looking for inconsistencies, many are completely avoidable. Here are five common red flags that increase your risk — and how to keep your business in the clear.
1. Excessive Deductions That Don’t Match Income
If your business earns $60,000 but claims $40,000 in deductions for meals, travel, or office expenses, the IRS may flag your return. Deductions should be reasonable and in line with industry norms.
2. Consistent Yearly Losses
Reporting a net loss multiple years in a row can make the IRS question whether you’re running a business or a hobby. Real businesses must show profit at some point.
3. Large Cash Transactions or Unreported Income
The IRS matches 1099s and W-2s to your return. Missing reported income is a major red flag, and large cash deposits can invite extra scrutiny if they don’t match your business activity.
4. Incorrectly Classified Workers
If you’re paying someone like an employee but filing them as a contractor (1099), you risk penalties. The IRS takes misclassification seriously.
5. Home Office Deduction Misuse
You can only claim a home office deduction if the space is used exclusively for business. Using your kitchen table won’t cut it.
📋 Want to Reduce Your Audit Risk?
We help small businesses keep clean records, make smart deductions, and stay off the IRS radar. Let’s review your last return or current bookkeeping and catch red flags before they become problems.
📅 Book your audit risk review today
👉 https://calendly.com/castlerocktax/30min
📲 Prefer to talk first? Call us at 786-686-6285
💼 Experienced. Virtual. Bilingual.