No small business owner wants to open their mailbox and find a letter from the IRS or California Franchise Tax Board. An audit can feel overwhelming and stressful. It takes time away from running your business, and if you’re not prepared, it can get expensive fast.
Here’s the good news: most audits happen because of mistakes that are easy to avoid. When you know what the IRS is looking for, you can keep your business off their radar. We’ve helped many small business owners navigate audits successfully—and even more importantly, avoid them in the first place. Here’s what you need to know.
Mixing Personal and Business Money
This is one of the biggest mistakes small business owners make. When you use your business account to pay for personal things, or claim family dinners as “business meetings,” you’re asking for trouble. The IRS looks for clear lines between your personal life and your business.
How to stay safe:
- Open separate bank accounts for your business and personal expenses
- Get a business credit card and use it only for work purchases
- Keep careful records and only write off expenses that are truly for your business
Clean records make your life easier at tax time and keep the IRS from asking questions.
Claiming Too Many Deductions
Everyone wants to lower their tax bill, but claiming deductions you can’t prove is risky. The IRS expects your deductions to match your type of business and its size. If you run a small landscaping company but claim massive travel expenses, that’s going to raise eyebrows.
How to stay safe:
- Only deduct expenses you can back up with receipts
- If you claim a home office deduction, measure the space carefully and use it only for work
- Work with a tax professional who knows how to find every legal deduction without going too far
The right advisor can help you save money without triggering an audit.
Getting Your Income Wrong
The IRS receives copies of all your W-2s, 1099s, and payment processor reports. They check these against what you report on your tax return. If the numbers don’t match—even by a small amount—it can trigger a review.
How to stay safe:
- Make sure every 1099 and W-2 you receive shows up on your return
- Check all numbers twice before you file
- Keep good records of cash payments
Even honest mistakes can lead to audits, so accuracy matters.
Running a Cash Business
If your business handles a lot of cash—like a restaurant, salon, car wash, or retail shop—the IRS pays extra attention. That’s because cash is easier to forget to report or to inflate expenses with.
How to stay safe:
- Keep a daily cash log and stick to it
- Deposit cash into your business account regularly
- Save documentation for every transaction
Good bookkeeping shows the IRS you’re being transparent and honest.
Making Home Office Mistakes
The home office deduction is real and legal, but many people use it wrong. You can’t deduct your kitchen or living room just because you sometimes check email there. The space needs to be used only for business.
How to stay safe:
- Only deduct space that’s exclusively for your work
- Take photos and measurements to prove your claim
- Update your calculation if you move or change your workspace
Used correctly, this deduction saves you money without causing problems.
Reporting Big Losses or Donations
If your charitable donations or business losses seem too large compared to your income, the IRS might take a closer look. While losses and generosity are real, the numbers still need to make sense.
How to stay safe:
- Keep receipts and acknowledgment letters for all donations
- For business losses, document what went wrong and your plan to turn things around
- Be consistent year to year
Good records prove you’re being honest.
Mixing Up Employees and Contractors
Many small businesses get in trouble by calling employees “independent contractors” when they shouldn’t. The IRS has strict rules about who qualifies as a contractor, and they check carefully.
How to stay safe:
- Learn the IRS guidelines for contractors versus employees
- Use written agreements and keep records of independent work
- Ask your accountant if you’re not sure how to classify someone
Getting this wrong can cost you back taxes, penalties, and interest.
Missing Deadlines
Sometimes the simplest mistake is the one that gets you noticed. Late filings, missed quarterly payments, or incomplete forms all attract attention from the IRS.
How to stay safe:
- Mark all tax deadlines on your calendar at the start of each year
- Set aside money for quarterly payments as you go
- Consider hiring a professional to keep everything on schedule
When you file on time and accurately, the IRS usually moves on without looking twice.
Stay Ahead of Problems
Avoiding an audit isn’t about being perfect. It’s about being organized, honest, and consistent. Clean books, accurate reporting, and professional help make all the difference.
If you’re worried about your audit risk or have already received a notice, Tax Crunch can help. From bookkeeping and tax filing to audit representation, our team knows how to protect small businesses and keep you compliant.
Call (650) 273-3910 today to schedule a consultation and make sure your business stays on the right side of the IRS.