3 Reasons The IRS Will Audit Your Small Business
UPDATED for 2025
Will the IRS audit your small business? I know it’s not a fun thing to think about, and I don’t want to put fear into your day. (As a small business owner, you’ve got enough going on!) But as an accountant who is looking out for you, I want to share the things you need to know. And one of those things is about the possibility of a tax audit.
Tax audits are a real part of owning a business. They can be even if you don’t, but the odds of getting audited seem to be higher if you do.
So how likely is it that the IRS will audit your small business? Let’s talk about that now.
First, let’s talk data. As of the end of the 2023 fiscal year, less than 1% of all returns filed between 2013 and 2023 were audited. Why is this number sound relatively low?
A lot of it has to do with limited resources. AND, of course, there was a lot craziness during COVID. We had SBA loans and PPP loans. We also had the ERC credit paired with the funding for the IRS to close the “tax gap.”
Then, a while back there was concern about tax audits surging due to hiring more IRS agents. Did any of this pan out? Honestly, it’s not clear given the data we have right now.
But one thing is for sure. You DON’T want to put yourself in a position of fear and anxiety when it comes to your taxes, no matter what the odds really are of a tax audit. And there’s nothing quite like the peace of mind that your business is ready for ANYTHING.
That’s what I’m here to help you achieve! And the first step is to know the little things that could trigger an audit, and how to properly prepare yourself and your business so that you’re a LOT less likely to set them off.
Now, here are the top 3 reasons the IRS audits:
1-Failing to report or unreported income. The IRS will match the data from what you report against what everyone else reports. This includes things like 1099s from merchants, customers, gambling, rent, W2 income, unemployment income, etc. If your numbers don’t match, don’t exist, or are under what has been reported, this is a red flag for the IRS. (This can also be attributed to a “whoops I put the number in wrong” if you are doing your own taxes.)
2-Earned Income Tax Credit (EITC). The IRS estimates that around 26% ERC claims are done in error. So if you claimed one, make sure you have all the proper documentation to prove how you got there.
3-Losses on a Schedule C (and Schedule C filers in general). Having losses too many years in a row is also a red flag, unless there’s some special case (like research and development phases).
Most people who have a small business tend to take on their data entry themselves. This is a very dangerous game, even if you have hired a CPA to file your taxes. CPAs don’t normally verify all of your expenses, but they get in writing that you have verified it.
So if you don’t have someone looking over your books (other than your CPA) you could be writing off things that you think are legitimate business expenses, but are not. This can trigger an audit.
As someone who looks at dozens of books and business tax returns every day (for over 17 years now!), I can attest that most books are NOT done correctly. Even the ones that hire CPAs to file their taxes.
Compliance is KEY. After that, you can look into legal ways to lower your tax bill. It’s the best way to ease your mind going into this upcoming tax season.
So what questions do YOU have about preventing business tax audits, and what to do if one happens? I’d love to know! Leave your questions below…
Until Next Time,
Love, Light, & MONEY, Honey…
Kaylee
P.S. If you want to lower your tax bill the RIGHT way and at the same time get all the Tax Deductions your small business is due, my FREE checklist is a great place to start!
Get my handy Tax Deductions Checklist “20 Common Tax Deductions Even Experienced Entrepreneurs Might Miss” right HERE!