5 Mistakes That Skyrocket Your Audit Risk (and How to Avoid Every Single One)

Savvy or Surrender, Episode 13 – Blog Edition

If you’re a business owner—especially in the trades—there are five mistakes that can quietly crank up your chances of being audited. And no, IRS audits are not random. They’re not a cosmic dartboard situation.

The IRS uses big data, algorithms, and AI (yes, the robots are watching) to identify numbers that don’t add up and behaviors that don’t make sense. But here’s the good news: if you understand the patterns, you can avoid the trouble.

Let’s break down the top audit triggers and how to stay far away from them.

Audit Red Flag #1: Underreported Income

This is the IRS equivalent of spotting smoke and assuming there’s fire.

Here’s why it’s a big deal:
Your customers, your payment processors (Stripe, Square, PayPal, Venmo), and your bank all send their reports to the IRS. If your tax return reports less than what the IRS already has in their system—even by a little—you get flagged automatically.

Most common contractor mistakes include:

• Forgetting 1099s from general contractors

• Not updating your W-9 after becoming an S-Corp

• Accepting cash jobs and never depositing them

• Mixing business deposits into personal accounts

• Ignoring Venmo, Zelle, and PayPal transactions

What to do instead:

• Always deposit cash income

• Track revenue using bookkeeping software (QBO, FreshBooks, Wave, or Kick—the one you’re helping develop!)

• Keep payment statements from GCs

• Confirm that 1099s are issued under the correct entity

Bottom line: If the IRS sees income your tax return “forgot,” they will send you a love letter— and not the good kind.

Audit Red Flag #2: Excessive or Unusual Deductions

The IRS expects your deductions to be proportionate to your revenue and your industry. When something looks wildly out of sync, the system flags it.

Common red flags:

• Extremely high vehicle expenses

• Big equipment write-offs with no documentation

• High travel or meal expenses

• Showing no profit year after year (aka “I swear this isn’t a hobby”)

And remember:
A 100% bonus depreciation write-off doesn’t mean you can ignore the rules. Large purchases still need to be capitalized correctly—even if they’re fully expensed.

How to avoid trouble:

• Document everything over $75

• Keep business and personal expenses separate

• Work with a tax pro before taking large deductions

• Break down expense categories (don’t “clump” everything into “marketing” or “auto”)

Pro tip: If your $100K business claims $90K in vehicle expenses, expect a letter. Probably hand-delivered by a robot drone at this point.

Audit Red Flag #3: Misclassifying Workers

Contractors get hammered by this one all the time.

If you’re paying someone like an employee but calling them a contractor, the IRS sees dollar signs—and not for you.

Red flags include:

• Paying subs without W-9s

• Not issuing 1099-NECs

• Contractors who work full-time for you

• Workers who don’t send invoices and instead get paid like payroll employees

Here’s the rule of thumb:
If you control when, how, and what they do…
They’re an employee. Period.

To stay compliant:

• Collect W-9s and certificates of insurance before paying a subcontractor

• Use written contracts—not handshakes

• Treat contractors like independent businesses

• Issue 1099s to anyone who receives $600+

Audit Red Flag #4: Messy or Missing Records

If you can’t prove an expense, the IRS assumes it’s invalid.
Simple as that.

The biggest problems include:

• No written mileage log

• Cash expenses with zero documentation

• Beautifully suspicious round-number deductions ($3,000, $5,000, $10,000)

• Missing receipts for large purchases

How to clean this up fast:

• Use bookkeeping software (QBO, Wave, FreshBooks, Kick)

• Take photos of receipts over $75

• Use mileage apps (QuickBooks app or MileIQ)

• Pull monthly P&L and balance sheet reports

• Keep invoices from suppliers, vendors, and GCs

If your books look like a Jackson Pollock painting, the IRS will absolutely interpret it as “creative accounting.”

Audit Red Flag #5: Claiming the Home Office Deduction Incorrectly

The home office deduction isn’t dangerous.
Claiming it wrong is dangerous.

Ways business owners mess this up:

• Claiming rooms not used exclusively for business

• Writing off half the house with zero documentation

• Ignoring the squared footage math

• Using garage space but not including the garage in the total square footage

Safe ways to do it:

• Measure the space

• Take photos

• Keep utility bills

• Only claim areas used exclusively for business

• Count legitimate storage space for tools/inventory

And yes—you can have multiple business locations. Even the IRS agrees (thanks to a helpful court case involving a doctor who worked from home and at the clinic).

The IRS Isn’t Expecting Perfection—Just Honesty

Tax returns aren’t an exact science. Two tax pros can prepare the same information and get different results (you’ve seen this firsthand).

What the IRS does want is:

• Consistency

• Documentation

• Reasonable numbers

• Accurate income reporting

If you can do those things, you dramatically reduce your audit risk—even in an AI-driven enforcement era.

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Final Thoughts

Stay savvy.
Stay organized.
And never surrender your profit to bad decisions—or to the IRS.