The IRS uses computer scoring to compare your return against similar businesses. When your numbers look unusual compared to the norm for your industry and income level, your return gets flagged for review. This doesn’t mean every flagged return gets audited, but it does mean someone takes a closer look.

The biggest trigger is mismatched information. If your 1099s show $150,000 in payments received but you report $120,000 in gross receipts, that discrepancy gets noticed automatically. The IRS receives copies of every 1099 and W-2 issued to you. When those numbers don’t match your return, expect questions.

High deductions relative to income draw attention. A business grossing $80,000 that claims $25,000 in vehicle expenses and $15,000 in travel looks suspicious. Those deductions might be legitimate, but they’re outside normal ranges and will likely trigger scrutiny. The same applies to home office deductions, meals, and entertainment expenses that seem disproportionate to your revenue.

Cash-heavy businesses face more scrutiny because unreported income is harder to track. Restaurants, salons, auto repair shops, and contractors handling cash payments get audited at higher rates than businesses with purely electronic transactions.

Repeated losses raise flags, especially for businesses that never seem to turn a profit. The IRS wants to determine whether you’re running an actual business or claiming a hobby as a business to deduct personal expenses. Three or more years of losses in a five-year period can trigger this review.

Misclassifying employees as independent contractors is a common audit trigger. The IRS loses payroll tax revenue when workers are misclassified, so they actively look for businesses that should be paying employment taxes but aren’t.

Large year-over-year changes in income or deductions can prompt questions. If your revenue doubles but your cost of goods sold stays flat, or if your deductions suddenly triple without a clear business reason, your return looks unusual and may get pulled.

Poor recordkeeping doesn’t directly trigger audits, but it turns manageable audits into disasters. When an examiner asks for documentation and you can’t produce it, deductions get disallowed. This is where small business bookkeeping services pay for themselves many times over. Clean books with proper documentation mean you can defend every number on your return.

The best prevention is accurate reporting with documentation to back it up. Don’t inflate deductions. Report all income even when you didn’t receive a 1099. Keep receipts and records organized by category and year. When your return matches your records and your records match third-party reporting, you’ve eliminated most audit risk.

If you do get audited, don’t handle it yourself. An Enrolled Agent can represent you before the IRS and knows how to respond to examiner requests without volunteering information that creates new problems. Most audits are correspondence audits handled by mail, and having professional representation often determines whether you owe additional tax or walk away clean.