What Actually Gets a Small Business Audited (From Someone Who Represents the Audited)

As an EA — a federally licensed tax practitioner — part of my job is representing business owners after the audit letter arrives. Which gives me a useful vantage point on what puts people on that list in the first place. It's rarely bad luck. It's usually one of these.

1. Income that doesn't match the paper trail

The IRS computer-matches your return against every 1099 and W-2 filed under your identification numbers. A gap between what your clients reported paying you and what you reported receiving is the single most reliable way to generate IRS attention — because a machine catches it, no human judgment required. Before filing, reconcile your books against every information return you received. If a 1099 is wrong, get it corrected at the source; don't just report the "right" number and hope.

2. Deductions out of proportion to the business

Legitimate expenses are yours to claim — all of them. But deductions that are outsized for your revenue or your industry stand out statistically: heavy travel and meals, an aggressive home-office claim, a vehicle that's somehow 100% business. The defense isn't timidity, it's documentation. Claim what's ordinary and necessary for your business, and keep records that let every line survive a second look. A deduction you can substantiate is not a risk; a deduction you can't is a liability with a delay on it.

3. Cash — the amounts you must report

Cash-intensive businesses draw extra scrutiny by nature. And there's a hard rule inside that: receive more than $10,000 in cash in one transaction (or related transactions) and you must file Form 8300. Skipping that filing is its own violation, separate from any income-tax issue, and penalties for willful failures are severe. Report the transactions, keep meticulous deposit records, and make sure the bank deposits reconcile to the books — unexplained deposits are what auditors build cases from.

The pattern underneath

Every trigger above is a mismatch: return vs. information filings, deductions vs. business reality, deposits vs. reported income. Books that reconcile are the whole game. That's not something you fix in April; it's something you run all year.

If your books and your returns have drifted apart — or a letter has already arrived — attach what you have with the paperclip in the chat, and we'll scope and quote the work in writing after intake. The free sample chapter of my Guide is at /book.