Introduction
An IRS field audit is one of the most invasive audit types because an agent comes onsite to review books, receipts, contracts, and business operations. Field audits are typically reserved for returns that show issues requiring closer inspection—discrepancies that can’t be resolved by mail alone. Understanding common triggers helps you reduce audit risk and be better prepared if selected.
In my 15+ years as a CPA advising small businesses, I’ve seen many returns that could have avoided a field audit with clearer records or a simple correction before filing. Below I summarize the most frequent triggers, give practical mitigation steps, and provide an action checklist you can start using today.
Why the IRS selects returns for field audits
The IRS uses computerized and manual methods to select returns for examination. These include scoring models (commonly referred to as DIF or similar risk-scoring systems), automated matching of third‑party information (W‑2s, 1099s, bank reporting), targeted industry project initiatives, and referrals from other IRS units. When the issue appears to be material or complex, the IRS may escalate to a field audit to review operations directly (IRS guidance: Audit techniques and recordkeeping) [https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-for-businesses; https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping-for-small-business].
Top triggers for field audits — with examples and fixes
1) Significant discrepancies in income reporting
- Why it flags: If reported receipts are unusually low relative to expenses, bank deposits, or industry norms, the IRS will investigate. Automated third‑party matching makes missing 1099 income and mismatches easy to detect.
- Example: A restaurant reports unusually low sales compared with area peers and shows frequent large cash deposits not reflected on sales records.
- What to do: Reconcile gross receipts to POS reports and bank deposits monthly. If owner draws, contributions, or loan repayments appear as deposits, document and label them clearly in your bank reconciliation. Implement a reliable POS or sales-tracking method for cash-heavy businesses.
2) Improperly deducting personal expenses as business expenses
- Why it flags: The IRS scrutinizes mixed‑use items (car, home office, travel) and may view full deductions for partially personal items as abusive.
- Example: Claiming the full cost of a vehicle or a large home utility deduction without substantiating business‑use percentage.
- What to do: Keep contemporaneous logs (e.g., mileage logs), allocate costs by business‑use percentage, and retain receipts and invoices that document business purpose. For home office, ensure the space meets the IRS test for regular and exclusive use; document square footage and business activity.
3) Weak, missing or disorganized records
- Why it flags: An inability to substantiate deductions or income often leads to expanded on‑site review or adjustments.
- Example: Client has bank statements but no receipts or vendor invoices for major expense categories.
- What to do: Keep organized digital copies of receipts, supplier invoices, contracts, and payroll records. Reconcile bank and credit card accounts monthly. The IRS advises retaining records that support items reported on returns (see IRS recordkeeping guidance) [https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping-for-small-business].
4) Mismatches with third‑party information (1099s, W‑2s, bank reporting)
- Why it flags: The IRS receives copies of many informational returns and will automatically compare them to what you report.
- Example: You receive multiple 1099‑NEC forms and don’t report the amounts, or you underreport income shown on 1099s.
- What to do: Before filing, verify all 1099s and W‑2s against your books. If you find errors on a 1099, contact the payer to correct it.
5) Unusually large or industry‑outlier deductions
- Why it flags: Deductions far above industry norms draw attention and may trigger a deeper review to confirm business purpose and documentation.
- Example: An unusually large advertising or travel expense relative to revenue.
- What to do: Keep receipts, invoices, contracts and contemporaneous notes of business purpose. Compare your expense ratios to industry benchmarks and be prepared to explain departures.
6) High volume of cash transactions
- Why it flags: Cash-heavy businesses are historically scrutinized because cash is easier to underreport.
- Example: Service businesses or retail establishments with significant daily cash sales that don’t reconcile to bank deposits.
- What to do: Use a POS system, maintain daily sales logs, deposit cash frequently, and document cash sales with receipts to customers when possible.
7) Complex ownership or multiple entities with inconsistent reporting
- Why it flags: Multiple entities increase the risk of misallocated income or expenses, related-party transactions, or intercompany transfers that aren’t properly documented.
- Example: One owner moves income between related companies without clear supporting agreements.
- What to do: Maintain clear intercompany agreements, consistent accounting methods across entities, and a documented allocation method for shared costs.
Practical mitigation checklist (start today)
- Reconcile bank and credit card accounts monthly and document reconciling items.
- Scan and organize receipts digitally with searchable file names and dates.
- Keep contemporaneous mileage logs for business vehicle use (date, miles, business purpose).
- Maintain a home office worksheet calculating business square footage and allocating expenses.
- Verify all 1099s/W‑2s before filing; correct errors with payers promptly.
- Use accounting software (e.g., QuickBooks, Xero) and lock accounting periods after review to prevent later unexplained changes.
- Adopt a written expense policy for the business (what is reimbursable, required receipts, approval steps).
What to do if you receive notice of a field audit
1) Read the letter carefully and confirm the agent’s identity and scope. The IRS will issue an appointment letter or contact you by phone and follow up in writing—don’t ignore it.
2) Limit what you provide initially—give only the documents requested. You have the right to understand the scope and, if needed, to request a reasonable time extension.
3) Consider professional representation. An authorized representative (CPA, EA, or tax attorney) can deal with the agent, assemble records, and protect privilege where applicable.
4) Prepare a clean, organized package of requested records. Create an index and highlight entries that directly support deducted items or income reported.
5) Don’t volunteer unrelated documents; be factual and cooperative. If disagreements arise, document your position and provide substantiation.
Rights and timelines
- Statute of limitations: Generally three years from the later of the return date or filing date. If gross income is understated by more than 25%, the IRS can extend the assessment period to six years. There is no time limit for fraud or if no return was filed (IRS guidance: statute of limitations) [https://finhelp.io/glossary/statute-of-limitations-on-audits/].
- You have the right to representation, to appeal proposed adjustments, and to request conference with the IRS Office of Appeals if an agreement cannot be reached (see “Your Rights During a Tax Audit” on our site) [https://finhelp.io/glossary/your-rights-during-a-tax-audit/].
When to involve a tax professional
If the proposed adjustment is material, if you are uncomfortable responding to the agent, or if you suspect the audit may expand into compliance issues (e.g., payroll, sales tax, employment classification), engage a CPA, Enrolled Agent (EA), or tax attorney. In my practice, early involvement of a tax professional often narrows the audit scope and shortens the process.
Resources and internal links
- Preparing your documents: Preparing for a Field Audit: Documentation Checklist [https://finhelp.io/glossary/preparing-for-a-field-audit-documentation-checklist/]
- If you receive mail-only requests first: What to Expect During an IRS Correspondence Audit [https://finhelp.io/glossary/what-to-expect-during-an-irs-correspondence-audit/]
Authoritative external source
- IRS — Recordkeeping for Small Business; Audit Techniques for Businesses: https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping-for-small-business and https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-for-businesses
Common FAQs (short answers)
- Q: How long should I keep records? A: Most tax records should be kept for at least three years; keep payroll records, employment tax records, and records supporting basis or large asset purchases longer (IRS guidance).
- Q: Can the IRS review my business operations? A: Yes. In a field audit the agent can examine books, inventory, fixed assets, and other operations relevant to the return.
- Q: Will an audit always result in taxes owed? A: No. Many audits result in no change, some result in agreement with adjustments, and a small percentage lead to penalties. Good documentation improves the likelihood of a favorable outcome.
Professional disclaimer
This article is educational and general in nature and does not constitute tax advice for your specific situation. Tax laws and IRS procedures change; consult a qualified tax professional (CPA, EA, or tax attorney) for guidance tailored to your business.
Author note
As a CPA working with small businesses for over a decade, I’ve found that proactive recordkeeping, clear separation of personal and business finances, and timely review of third‑party forms are the simplest, most effective ways to lower audit risk and shorten any audit that does occur.