Most Houston business owners I work with have the same quiet question on their mind every April: what are the chances I get audited? The honest answer is that overall audit rates are low, but certain patterns on a return push the odds up fast. After two decades of preparing returns and representing clients in front of the IRS, I can tell you the same handful of items show up over and over in audit notices. Here are the ten I watch for most carefully.
1. Income that doesn’t match what was reported to the IRS
The IRS receives copies of every W-2, 1099, K-1, and 1098 you do. Their computers cross-check those documents against your return automatically. If you forget a 1099-NEC from a side gig or under-report brokerage interest, the matching system catches it almost every time. This is the single most common trigger I see, and it’s also the easiest to avoid — gather every form before you file.
2. Round numbers everywhere
If your business return shows $10,000 in advertising, $5,000 in supplies, and $2,000 in meals, the IRS notices. Real expenses don’t come out to clean round figures. When deductions look estimated rather than tracked, it suggests the records behind them may not exist.
3. A Schedule C with consistent losses
Reporting a loss on Schedule C every year — especially in industries that look like hobbies (photography, horses, boats) — invites scrutiny. The IRS uses the “hobby loss” rules to disallow deductions if a business doesn’t show a profit in three of five years. If your sole proprietorship has been losing money for a while, get a CPA involved before filing again.
4. Disproportionately large deductions relative to income
The IRS uses statistical models (the DIF score) to compare your deductions to others in your income range. A Houston small business owner reporting $80,000 of revenue and $70,000 of expenses will look very different from peers and is more likely to get pulled for review.
5. Home office deductions on a return that doesn’t support them
The home office deduction is fully legitimate and I claim it for plenty of clients. But the rules are strict: the space has to be used regularly and exclusively for business. If you have a W-2 job and claim a $400/month home office on a small Schedule C, that combination raises eyebrows.
6. Cash-heavy businesses
Restaurants, salons, food trucks, laundromats, car washes — any business where cash is a meaningful share of revenue gets extra attention. The IRS knows cash is easy to under-report, so they audit these industries at higher rates. Strong daily sales reporting and clean point-of-sale records are your protection.
7. Real estate professional status without the hours to back it up
Houston has a huge real estate investor community, and the “real estate professional” designation is one of the most powerful tools in the code — it lets you deduct rental losses against ordinary income. But you need to log 750 hours per year in real estate trades or businesses, and it has to be more than half your working time. If you have a full-time W-2 job, claiming this status without a contemporaneous log is a fight you’ll lose. We cover this in detail on our real estate accounting page.
8. Large charitable contributions relative to income
Generosity is great, and I never want to discourage it. But charitable deductions over 30% of AGI — particularly non-cash gifts like donated stock, vehicles, or property — need solid appraisals and Form 8283 done correctly. The IRS audits non-cash contributions at notably higher rates.
9. Cryptocurrency activity
If you’ve traded crypto and answered “no” to the digital asset question on the 1040, you’ve created a problem. Exchanges now issue 1099-B and 1099-DA forms to both you and the IRS. Mismatches here are climbing fast and the IRS has dedicated resources to crypto enforcement.
10. Foreign accounts and FBAR issues
If you have foreign bank accounts that ever exceeded $10,000 in the aggregate during the year, you owe an FBAR (FinCEN 114) and possibly a Form 8938. Penalties for missing these are brutal — $10,000 per violation for non-willful, much more for willful. Houston has a big international community and this issue catches people every year.
What to do if you get a notice
Don’t panic and don’t respond before talking to a CPA. Most IRS notices are correspondence audits asking for one or two specific items, not a full field audit. With organized records and a clear response, the majority of these get resolved without much pain. If you’re currently looking at a CP-2000 or audit letter, our tax resolution team handles these every week.
If you want a second set of eyes on your return before it goes in — or you’re already dealing with the IRS — call the office at (832) 983-7080 or reach out through the contact page. Quiet, organized, on time. That’s how we keep clients out of trouble.