Business Income Red Flags That Could Attract IRS Attention (Even If You’re Playing by the Rules)

No one wants a surprise letter from the IRS - especially when you’ve been doing your best to keep things honest. But when it comes to business income, a few common red flags can still raise eyebrows (even if you’ve done nothing wrong).

Here are some of the top income-related issues we see and how to avoid them:

1. Forgetting to include income from payment platforms
   Apps like Stripe, PayPal, Venmo, and Square now report income to the IRS. If you’re only counting what lands in your main bank account, you might be missing revenue that still gets reported - ouch; don’t forget to pull those 1099-Ks!
2. Your deposits don’t match your reported sales
   If your bank deposits show more (or less) than what you report as income, it can look like you're fudging the numbers, even if it's just messy tracking. The solution? Match deposits to invoices, and make sure all income is accounted for.
3. High deductions with very low income
   If you’re claiming a laundry list of deductions but reporting very little revenue, that’s a red flag. Make sure your write-offs are legit and align with actual business activity. (Yes, even that “team-building spa day.”)
4. Drastic changes in income from year to year
   Big income swings can happen, but without proper context or documentation, they may raise questions. Keep solid records to explain the “why” behind any dips or jumps in revenue.
5. Mixing business and personal money
   Depositing personal funds into business accounts (or the other way around) without clear records creates a paper trail nightmare. Keep your accounts and your receipts separate and well-documented.
6. Inconsistent reporting between your books and tax return
   Your bookkeeping should match what gets reported to the IRS. If your Income Statement says one thing and your tax return says another, it can trigger unnecessary scrutiny.
7. Operating a cash-heavy business without proper records
   If you’re in an industry that handles a lot of cash (like beauty, hospitality, or retail), the IRS pays closer attention. That doesn’t mean you’re doing anything wrong, but it does mean your tracking needs to be extra dialed in.

Here’s the bottom line: when your numbers are unclear or inconsistent, it can look worse than it is. And that’s exactly where we come in.

Want a second set of eyes on your books? Let’s clean up your numbers and get you audit-ready without the stress.