The IRS uses a scoring system called the Discriminant Information Function (DIF) to flag returns that look unusual compared to similar businesses. You don’t need to do anything wrong to get flagged. You just need numbers that look different from what the IRS expects for your income level and industry.

Reporting net losses on Schedule C for multiple years in a row is one of the biggest triggers. The IRS wants to see that your business is actually trying to make money, not just generating deductions. If you’re a plumber showing a loss three years running, that gets attention. Sometimes those losses are legitimate, especially during startup or a rough stretch. But if your books don’t support the story, you have a problem.

Worker misclassification is a major trigger for trade and service businesses. Paying someone on a 1099 when the IRS thinks they should be a W-2 employee is something they actively look for. If you have crews showing up to your jobs every day, using your tools, following your schedule, and you’re paying them as independent contractors, that’s a flag. The IRS loses payroll tax revenue on every misclassified worker, so they care about this one a lot.

High deductions relative to your income will draw attention. Claiming $60,000 in vehicle expenses on $150,000 in revenue looks aggressive. Same with meals, travel, and home office deductions that seem disproportionate. You might be entitled to every dollar of those deductions, but if the ratio is outside the norm for your industry, expect questions. This is where having a Long Beach bookkeeper who understands your business makes a real difference. Accurate categorization and documentation mean you can defend every line on the return.

Cash-heavy businesses face more scrutiny in general. If your reported income doesn’t match your lifestyle or your bank deposits, the IRS notices. Contractors and service companies that take cash payments need to report all of it. Unreported income is fraud, not a gray area.

Large or round-number deductions raise flags too. A materials expense of exactly $10,000 looks estimated rather than tracked. Real expenses come in odd amounts. If your books show precise, irregular numbers supported by actual receipts and invoices, that’s far more credible than a handful of round figures.

Mismatches between what you report and what others report about you also trigger reviews. If a general contractor reports paying you $45,000 on a 1099 but you only report $30,000 in income, the IRS will notice. Their computers cross-reference these filings automatically.

The best way to reduce audit risk is straightforward. Keep clean books, report all income, classify workers correctly, and document your deductions. Most audits aren’t random. They happen because something on the return didn’t add up. If you do get a notice or audit letter, having organized records and professional tax audit support turns a stressful situation into a manageable one. The businesses that panic during audits are almost always the ones that didn’t keep proper records to begin with.