IRS Red Flags Around Business Income (and How to Avoid Them)

Nobody wants to open the mailbox and find a surprise letter from the IRS. Even if you’re running your business honestly, certain income-related issues can draw unwanted attention. The good news? Most of these red flags can be avoided with clean bookkeeping and consistent reporting.

Here are some of the most common income red flags business owners face—and how to prevent them:

1. Missing Side or Payment App Income

Payment platforms like Stripe, PayPal, Venmo, and Square now report income directly to the IRS. If you’re only tracking what lands in your main bank account, you could easily overlook revenue.

2. Deposits Don’t Match Sales

If your bank deposits show more (or less) than your recorded sales, it can look like underreporting—even if it’s just poor recordkeeping.

3. Large Deductions with Low Revenue

Claiming big write-offs while reporting little income can raise questions. Always ensure your deductions align with actual business activity.

4. Unexplained Year-to-Year Changes

Sharp drops or spikes in income may attract attention unless you have clear documentation to explain the change.

5. Mixing Personal & Business Funds

Depositing personal money into business accounts (or vice versa) without documentation creates confusion and risk. Keep the two separate.

6. Inconsistent Reporting

Numbers on your tax return should match your bookkeeping. Discrepancies across documents can invite unnecessary scrutiny.

7. Cash-Heavy Businesses Without Records

If you run a cash-based business (hospitality, beauty, retail, etc.), the IRS pays closer attention. Accurate logs and consistent records are critical.

Key takeaway: If your numbers are messy, it can look worse than it really is. Clean, consistent bookkeeping is your best defense against IRS red flags.

Need a second set of eyes? We’ll review your books, organize your records, and keep your business audit-ready—without the stress.