12 I Business Income-Related Red Flags: What Could Trigger an IRS Notice?
Business Income-Related Red Flags: What Could Trigger an IRS Notice?
Nobody wants a surprise letter from the IRS.
And yet, even when you're doing your best to follow the rules, certain patterns in your business income can raise red flags—and land your business under unnecessary scrutiny.
Whether you're a startup founder, real estate professional, nonprofit director, or ministry leader, understanding the most common business income-related red flags can help you stay compliant and audit-ready.
In this post, we’ll walk you through the most common red flags and how to avoid them, so you can keep your finances clean and your stress levels low.
🚩 1. Underreporting Income
One of the biggest and most obvious red flags is when your reported income doesn’t match what’s been reported to the IRS by others (think: 1099s from clients, payment processors, banks, etc.).
✅ How to avoid it:
Keep accurate records of all revenue, including cash payments, online transactions, and income without a 1099.
Reconcile your bookkeeping with year-end 1099s to ensure nothing is missing.
🚩 2. High Volume of Cash Transactions
Businesses that rely heavily on cash—like event vendors, real estate professionals receiving earnest money deposits, or ministries handling tithes—often trigger closer IRS scrutiny.
✅ How to avoid it:
Use accounting software like QuickBooks Online or Aplos to record all cash transactions.
Deposit cash into your business bank account promptly to create a clear paper trail.
🚩 3. Inconsistent or Drastic Income Changes
A sudden drop (or surge) in income that doesn’t line up with business activity or industry trends could prompt the IRS to take a closer look—especially if not supported by strong documentation.
✅ How to avoid it:
Keep notes or documentation explaining any significant income changes (e.g., loss of a major contract, seasonal work, large one-time donations).
Communicate changes with your accountant so your tax return reflects the full story.
🚩 4. Mixing Personal and Business Income
Using personal bank accounts for business income—or vice versa—is risky and can confuse the IRS about what’s taxable and what isn’t.
✅ How to avoid it:
Open dedicated business bank accounts.
Keep personal and business finances completely separate.
Use software that supports proper income classification.
🚩 5. Unreported Nonprofit Income
For nonprofits and religious organizations, not reporting all revenue streams—especially income from unrelated business activities—can lead to serious compliance issues.
✅ How to avoid it:
Track income by category: donations, grants, sales, rental income, etc.
If you have Unrelated Business Income (UBI), be prepared to report it with a separate form (IRS Form 990-T).
Use tools like Aplos that are built for nonprofit accounting.
🚩 6. Bookkeeping That Doesn’t Match Your Deposits
If your reported income doesn’t align with your bank deposits, the IRS may suspect that income is being underreported—even if it’s due to bookkeeping delays or errors.
✅ How to avoid it:
Regularly reconcile your books to your bank statements.
Use accounting software to automatically match income to deposits.
Work with a bookkeeper to stay current and consistent.
Final Thoughts
Getting an unexpected letter from the IRS is never fun, but most income-related red flags are completely avoidable. The key is keeping clean, accurate records and staying consistent in how you report income.
📬 Read our full blog to dive deeper into these red flags and learn how to avoid common mistakes that could attract unwanted IRS attention.
Need help reviewing your business income or cleaning up your books before tax season? We specialize in helping startups, nonprofits, and real estate businesses stay audit-ready throughout the year. Let’s ensure your business complies.