What Triggers an IRS Audit for Small Businesses
IRS audits of small businesses hover around 0.5–2% depending on the return type and income level, but certain patterns raise your odds meaningfully. Here's what to know.
The statistical triggers
Very high or very low deductions relative to industry norms (DIF score).
Schedule C losses year after year (hobby loss risk).
Home office and vehicle deductions disproportionate to income.
Large charitable deductions relative to AGI.
Cash-intensive business (restaurant, laundromat, taxi/rideshare).
Cryptocurrency activity, especially if the '1040 crypto question' is answered inconsistently with reported activity.
S-corp specific triggers
Owner takes distributions but pays low or no W-2 wages — the reasonable compensation issue.
Large owner shareholder loans that never get repaid.
Fringe benefits (health insurance, auto) not properly reported on W-2.
Matching document triggers
1099 income received but not reported on return — automatic notice (CP2000), not really an audit but effectively one.
K-1 income received but not reported on personal return.
Employer W-2 not matching what employee reports.
Broker 1099-B activity not reported.
How to stay off the list
Report all income — 1099 mismatches are the fastest path to IRS contact.
Keep contemporaneous records: mileage logs, home office measurements, receipts for large deductions.
Reasonable S-corp compensation with documentation.
Consistent year-over-year approach — sudden large changes trigger review.
File on time. Late filers are more likely to be reviewed.
What to do if you get audited
Don't ignore letters. Response deadlines matter.
Have a professional represent you. You don't have to speak to the IRS yourself — a CPA or EA can handle everything.
Provide only what's specifically requested. Volunteering additional information broadens the audit.
A quick disclaimer
This article is general information for Montana small business owners, not tax, legal, or accounting advice for your specific situation. Rules change, and how they apply depends on facts we don't know about you. Before acting on anything you read here, talk to a qualified professional. If you're a Montana business owner and want a real conversation about your books, payroll, or tax, that's what Marlow Accounting is here for — call 406-290-1214 or schedule a discovery call.