When the Internal Revenue Service decides to take a closer look at your tax return, it’s usually because something stood out. Audits rarely happen at random. For business owners, recognizing what draws that kind of attention is key to avoiding it in the first place. As we head into the 2025 tax season, now is a good time to reevaluate your return process and understand what the IRS looks for.
Understanding what may trigger an audit isn’t just about staying compliant. It’s about preparation and peace of mind. Founders and managers already juggle plenty. An audit adds deadlines, paperwork, and stress. Knowing which activities raise red flags gives your business more control and a stronger filing strategy.
Common triggers of IRS audits
IRS audits tend to follow recognizable patterns. Certain elements of a return are flagged more often than others. While no tax return can be completely immune, these are some of the most common reasons a business might draw the IRS’s attention.
1. High-income discrepancies
Large income increases from one year to the next or income that doesn’t match third-party documents like W-2s or 1099s can raise questions. The IRS uses matching systems to identify differences; discrepancies often result in scrutiny.
2. Large charitable donations
While charitable giving is encouraged, donations that are unusually high compared to your income or inconsistent with previous years may raise suspicions. Clear documentation and proper reporting are important here.
3. Unreported income
If income gets reported to the IRS by clients or financial institutions and you fail to include it in your return, that’s an automatic red flag. Omitting income, even unintentionally, can cause major issues.
4. Excessive business expenses
Overstating expenses can trigger an audit. This includes travel, meals, and entertainment that seem beyond what’s typical for your business size or industry. Deductions should be accurate, reasonable, and related directly to business activities.
5. Home office deductions
These deductions are often done incorrectly. If you claim space in your home for business use, it must be used regularly and exclusively for that purpose. Every square foot claimed must be justified and backed by evidence.
Recognizing these patterns does more than reduce sketchy reporting. It helps you be intentional and consistent. When claims fall outside normal limits, having supporting documentation can reduce the chances of a full-scale review.
How to reduce your audit risk
Avoiding an audit is not about doing less. It’s about being more precise. Building a sound record-keeping process not only lowers your audit risk but also helps your business stay organized and well-run. Here are a few key practices:
1. Maintain clear records
Each deduction should be backed by proper receipts, bank statements, invoices, or logs. Staying organized from the start can save significant time and worry in the future.
2. Evaluate your deductions
Large or unusual write-offs should have solid reasoning. Consult with a qualified tax advisor when claiming less-common expenses. Not every business trip qualifies, and not every expense is fully deductible.
3. Report all of your income
Even small amounts of income that don’t come with a tax document need to be included. The IRS looks at all available data and will act on any gaps they find.
4. Use accurate figures
Round numbers across your return may look like guesses. Use actual values instead. Consistent rounding to the nearest hundred or thousand makes your return look less credible and might trigger a review.
5. File on time
Late returns are more likely to be reviewed. Changes or amendments to filed returns should be addressed quickly and explained clearly. If deadlines are missed or documentation is inconsistent, audit chances rise.
Improving these practices sets your business up for fewer surprises and a stronger financial foundation. When returns are clean, verified, and timely, the IRS sees fewer reasons for concern.
Role of secure file storage in audit preparation
Getting ready for tax season isn’t just about what’s on your return. It’s also about how well you can back up every line item. Secure file storage can minimize audit stress by keeping all key records organized, accessible, and protected.
Modern IRS reviews often require digital documentation. If you’re relying on saved folders across multiple devices or unclear file names, retrieving what you need becomes difficult when time is tight. Using secure storage tools keeps records in one centralized, protected environment.
Centralized digital storage adds speed and accuracy when responding to document requests. Trying to retrieve old expense reports, client payment confirmations, or vendor contracts from scattered files wastes valuable time. Secure file storage helps ensure your reports are complete and audit-ready long before you need them.
Encryption helps protect those files further. It reduces the chances of data breaches, unauthorized access, or file tampering. In an audit, integrity matters. If your documents are manipulated or corrupted, proving your case becomes much harder. Encryption ensures your data holds up under review.
For instance, if your company claimed a large expense from upgrading internal software systems last year, proper documentation matters. If you store vendor invoices, purchase orders, and implementation records safely in one system, retrieving them is fast. Secure file-sharing platforms like Phalanx come with version history, access controls, and detailed timestamps for full traceability.
More than just a precaution, secure storage supports stronger tax practices overall. It allows clean collaboration between finance teams, CPAs, and legal professionals when complex matters arise. When the IRS asks for specific proofs, quick, organized access builds confidence and credibility.
Steps to take if you are audited
If your business gets a notice from the IRS, take it seriously, but don’t panic. Many audits are small in scope or triggered by inconsistencies that can be explained. Start with a clear strategy. Preparation and professionalism go a long way.
1. Read the IRS notice carefully
The letter will specify what’s being audited, what documents are required, and how much time you have to respond. Document these deadlines and reference numbers and start gathering what’s needed as soon as possible.
2. Collect your records
Look for everything related to the area in question. This includes receipts, contracts, bank statements, and any logs or summaries you kept. Keep both digital and printed versions in case the IRS wants specific formats.
3. Bring in a tax professional
Whether it’s your regular CPA or a specialist, professional help can prevent small errors from becoming larger issues. A tax advisor can also communicate with auditors on your behalf and guide your response strategy.
4. Stay organized and submit only what’s asked
Give the IRS what they requested—nothing more. Extra documents can lead to extra questions. Structure your submission with clear labels, proper dates, and a consistent format.
5. Be respectful and direct in communication
Avoid offering opinions or estimates. Stick to facts supported by written documentation. If a question is unclear, let your tax professional help draft your response.
Each audit varies, but these steps give you a consistent approach. A calm, collected response supported by accurate documents often leads to a much smoother resolution.
Navigating audits with confidence
IRS audits are rarely expected and never fun. But they don’t have to feel like a crisis. Being audit-ready is about having the right habits and the right tools in place well in advance of tax season.
Review what sent up red flags in the past—unreported income, large deductions, messy records—and work on addressing each one. Tighten your expense tracking, keep business and personal finances separate, and verify income before filing. These habits build an accurate, trustworthy profile over time.
Safe document storage isn’t just about reducing clutter. It gives you a clear advantage when questions arise. When digital files are organized and encrypted, your business is ready to show the complete picture without scrambling or second-guessing. Tools like Phalanx give your team reliable access backed by industry-grade protection.
When your financial records are clean and stored securely, the stress of audit season shrinks. Every file you save properly today helps protect your business tomorrow. Compliance becomes less about catching up and more about staying consistently prepared. In time, audits feel less like a threat and more like part of the process you’re already ready for.
Ensure that your tax preparation keeps you audit-ready all year by utilizing secure file sharing. Phalanx can help you manage your documents safely and efficiently, eliminating disruptions and stress associated with audits.
This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Please consult a financial professional for individual advice and recommendations.