Few things are as nerve-wracking for a business owner as an IRS audit. While audits can happen at random, certain red flags increase your risk significantly.

We’ve seen how small mistakes can lead to big problems:

• “I didn’t realize my deductions looked excessive for my income level.”
• “I accidentally left out a 1099 form and got flagged for underreporting income.”
• “My cash transactions weren’t well-documented, and the IRS demanded proof I didn’t have.”

If you’ve ever worried about triggering an audit, understanding the common red flags is the first step to staying protected.

1. Discrepancies in Income Reporting

The IRS cross-checks your tax return with forms like W-2s and 1099s. If your reported income doesn’t match, it raises immediate concerns.

The Fallout:

• Accuracy-related penalties of up to 20% of the underreported income.
• Back taxes, interest, and late-payment penalties.
• Possible fraud allegations, carrying fines of $250,000 and up to 5 years in prison.

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Source: IRS