Video · Brian Kim
IRS Audit RED FLAGS for the SELF EMPLOYED - IRS Audit Triggers
Brian covers the IRS audit red flags self-employed filers and small-business owners should know — the common triggers that increase audit risk and how to avoid them.
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Published on YouTube January 29, 2019 · 8:12 · Text on this page updated · About 7 min read
Key points from the video
- Brian's audit red flags come from returns he has been hired to fix after an audit. They apply to sole proprietors and single-member LLCs, and also to S corporations, partnerships and C corporations.
- Don't use clean, round figures for expenses, such as $1,000 for a phone and $5,000 for travel. Brian says it looks made up, and returns are screened by computer.
- A profit of exactly zero looks suspicious too, even if it really happened.
- Some expenses get more scrutiny, and whether they look high depends on your sales and your field: meals, mileage and the home office deduction. A large home office percentage, such as 30% or 40% of the home, pushes the boundaries.
- Report every tax form you receive. If you got a form, so did the IRS, and missing income will bring an IRS letter and possibly an audit.
Summarized from Brian's own words in the video.
What's changed since this video
Video published January 29, 2019. Checked against current sources on October 13, 2026. These updates are from the ClearValue Lending Team, not Brian.
- How the IRS picks returns Still current
In the video: Returns run through a scanner and IRS algorithms decide who to audit.
Now: Still broadly true. The IRS says it uses random selection and computer screening that compares your return with "norms" for similar returns, plus related examinations of returns linked to others under audit.
Source: IRS — IRS audits · as of
- Business mileage rate Changed
In the video: Mileage claims get scrutiny depending on your field.
Now: The IRS standard mileage rate was 58 cents a mile in 2019. For 2026 it is 72.5 cents (January to June) and 76 cents (July to December).
Source: IRS — Standard mileage rates · as of
- Forms reported to the IRS Changed
In the video: If you receive a tax form, so does the IRS.
Now: Still true. Mismatches lead to a CP2000 notice. Thresholds changed: businesses now report nonemployee pay of $2,000 or more (payments after 2025), and payment apps report above $20,000 and 200 transactions.
Sources: IRS — Understanding your CP2000 series notice ; 26 U.S.C. § 6041 (information returns; $2,000 threshold); IRS — Understanding your Form 1099-K · as of
Reader guide · ClearValue Lending Team
IRS audit red flags for the self-employed, checked against IRS rules
Brian's video lists the patterns he sees on self-employed returns that ended up audited. This guide follows his list in order. For each one, it explains the IRS rule behind it, what records protect you, and what has changed since January 2019. The IRS keeps its selection formula private, so where a point is Brian's judgment, we say so.
How the IRS chooses returns to audit
Brian covers this in the video · watch from 0:00
Brian says audited returns often have an obvious cause. The IRS describes its own methods in general terms. Being selected doesn't always mean there's a problem.
- Random selection and computer screening. The IRS compares your return with "norms" for similar returns. It builds those norms from audits of a random sample of returns in its National Research Program.
- Related examinations. Your return may be picked because it involves a business partner or investor whose return is under audit.
- Not triggers on their own. The IRS says getting a refund is not necessarily a trigger, and filing an amended return doesn't affect selection of the original.
Most audits look at returns filed in the last two years. The IRS can generally include returns from the last three years, and may add more if it finds a substantial error. It usually doesn't go back more than six.
Red flag 1: round, made-up expense figures
Brian covers this in the video · watch from 1:25
Brian's first point: if your Schedule C shows a phone expense of $1,000, supplies of $2,000 and travel of $5,000, it looks invented. Real expenses rarely land on round numbers. He says returns are scanned and screened by computer, so a pattern like this can stand out.
The fix is simple. Use real totals from real records. Pull them from your bank and card statements or your bookkeeping software, not from memory.
Keep the records that support every number. The IRS says you must keep receipts, canceled checks and other documents that back up income and deductions for as long as they may matter, which is usually until the period for assessing tax runs out.
| Situation | Time limit |
|---|---|
| Most returns | 3 years from the date you filed |
| Unreported income over 25% of the gross income on the return | 6 years |
| Fraudulent return, or no return filed | No limit |
Red flag 2: a profit of exactly zero
Brian covers this in the video · watch from 2:03
Brian's second point: when sales and deductions cancel out to exactly zero, it looks fishy, even if that really is what happened.
He doesn't say a loss or a small profit is wrong. Businesses lose money, especially early on. The problem is a result that looks engineered. If your numbers come out unusually even, double-check them against your records before you file.
The IRS screens returns against norms for similar returns.
Red flag 3: expenses out of line with your sales (meals)
Brian covers this in the video · watch from 2:54
Brian says some expense categories are questioned harder than others, and meals are one of them. There is no single dollar amount that is a red flag. It depends on your sales.
| Annual sales | How $20,000 in meals looks |
|---|---|
| $50,000 | Very high: an audit risk |
| $800,000 | Not high at all |
| $3,000,000 | Actually quite low |
Two IRS rules matter here. Business meals are generally only 50% deductible. And you can't deduct meals that are lavish or extravagant, or that are personal. Keep the receipt and a note of who attended and the business purpose.
Red flag 4: mileage that doesn't fit your field
Brian covers this in the video · watch from 4:13
On Schedule C you enter a business activity code, so the IRS knows your field. Brian says 20,000 business miles is normal for a salesperson or a real estate agent, but very high for a bookkeeper.
If you use your car for business and personal trips, you can deduct only the business share. You pick one of two methods: the standard mileage rate or your actual costs.
| Period | Cents per mile |
|---|---|
| 2019 (when the video was made) | 58 |
| January 1 to June 30, 2026 | 72.5 |
| July 1 to December 31, 2026 | 76 |
A mileage log is your defense. Record the date, the destination, the business purpose and the miles for each trip, as you go. A total written in at year end, with no log behind it, is exactly the kind of round number Brian warns about.
There are limits on the standard rate. The IRS says you can't use it if you operate five or more cars at once, and you generally must choose it in the first year the car is used for business.
Red flag 5: a large home office deduction
Brian covers this in the video · watch from 5:22
Brian's view: the home office deduction is real and you should take it if you qualify. But claiming 30% or 40% of your home, or even 20%, is on the high end and more likely to be challenged. Those percentages are his rule of thumb, not an IRS limit.
The IRS rule that matters most is exclusive use. In most cases, the space must be used regularly and only for business. A spare room that is also a guest room or a kitchen table doesn't qualify.
- Qualifies: space used exclusively and regularly as your main place of business, or to meet clients, or a separate structure used only for business.
- Exceptions to exclusive use: storage of inventory when your home is your only fixed business location, and some daycare use.
- Regular method: deduct the business share of rent or mortgage interest, utilities, insurance, repairs and depreciation, based on square footage. Sole proprietors use Form 8829.
- Simplified method: $5 per square foot of business space, up to 300 square feet, claimed directly on Schedule C. No depreciation, less record-keeping.
If you use the simplified method, the largest deduction is $1,500 (300 square feet at $5). That can be a practical choice if your office is small and you want less paperwork.
Red flag 6: income forms you didn't report
Brian covers this in the video · watch from 6:35
Brian's last point: investment income, stock sales, interest and gambling winnings (Form W-2G) all come with tax forms. If you received a form, so did the IRS. If the income isn't on your return, expect a letter.
That letter is usually a CP2000 notice. The IRS sends it when income or payment information from third parties, such as employers or banks, doesn't match your return. It is not a bill, but you must respond by the date shown. If you don't, the IRS may send another notice and a bill.
| Form | What it reports |
|---|---|
| 1099-NEC | Pay for your services as a nonemployee ($2,000 or more, for payments after 2025) |
| 1099-K | Payment app and marketplace sales over $20,000 in more than 200 transactions; card payments of any amount |
| 1099-INT / 1099-DIV | Interest and dividends |
| 1099-B | Stock and other investment sales |
| W-2G | Certain gambling winnings |
Higher thresholds mean you may now get fewer forms. That doesn't change what you report. The IRS says all income from selling goods or services must be reported, whatever the amount.
If you get an audit letter
Brian's clients came to him after the audit started. Here is what the IRS says to expect.
- Check it is real. The IRS notifies you of an audit by mail. It won't start an audit by phone.
- Read what it asks for. A mail audit asks about specific items, such as income, expenses or itemized deductions. Some audits are in person, at an IRS office or your place of business.
- Gather your records. Send copies of the receipts, logs and statements behind each item. Keep the originals.
- Reply by the date in the letter. Ask for more time if you need it, and get proof that your reply was received.
- Consider help. A CPA, enrolled agent or tax attorney can represent you.
Next steps
Educational information, not tax or legal advice. ClearValue Lending is an education and comparison platform; it does not prepare tax returns or represent taxpayers. For an audit, talk to a CPA, enrolled agent or tax attorney.
Questions viewers ask
What are common IRS audit red flags for the self-employed?
Brian names round, made-up expense figures, a profit of exactly zero, expenses out of line with your sales such as meals, mileage that doesn't fit your field, a large home office deduction, and income forms you didn't report. The IRS doesn't publish its scoring formula.
How does the IRS choose returns to audit?
The IRS says it uses random selection and computer screening that compares your return with norms for similar returns, and related examinations of returns linked to taxpayers already under audit.
How far back can the IRS audit?
Generally three years. The IRS may add years if it finds a substantial error, but usually doesn't go back more than six. Most audits cover returns filed in the last two years.
How long should I keep business records?
Generally three years from filing, six years if you left out income of more than 25% of the gross income on the return, and indefinitely if a return was fraudulent or never filed.
Are business meals deductible?
Generally only 50% of the unreimbursed cost, and not if the meal is lavish, extravagant or personal. Keep the receipt and a note of who attended and why.
What is the 2026 mileage rate for business?
The IRS set two rates for 2026: 72.5 cents a mile for January 1 to June 30 and 76 cents a mile for July 1 to December 31.
Who qualifies for the home office deduction?
Generally, someone who uses part of the home regularly and exclusively as the main place of business or to meet clients. The simplified method allows $5 per square foot for up to 300 square feet.
What is a CP2000 notice?
A notice that income or payment information the IRS received from third parties doesn't match your return. It isn't a bill, but you must respond by the date listed.
Will the IRS call me to start an audit?
No. The IRS says it notifies you of an audit by mail and won't start an audit by telephone. Treat a call claiming to start an audit as a likely scam.
Full transcript
From YouTube's auto-generated English captions, cleaned for punctuation and paragraphs. Brian's words are unchanged except for clear caption errors; text in [brackets] marks an editor's insertion or audio the captions did not catch.
Read the full transcript (1,296 words)
Editor's note: The red flags in this video are Brian's observations from his practice. The IRS does not publish how it scores returns, so we can't confirm how much any single item raises audit risk. The percentages he gives for a home office are his own rule of thumb, not an IRS limit.
Introduction watch from 0:00
Welcome to our channel, ClearValue Tax. My name is Brian Kim, I'm a certified public accountant and one of the partners [of] our tax practice. Today we're going to be discussing how to minimize your audit risk. We're gonna identify the audit triggers and the red flags. This video is really catered for the self-employed people, so this is sole proprietorships, single member LLCs, but it's also applicable to business owners, those who are reporting on the 1120-S, which is the S corp, 1065s with their partnerships, and 1120s, which are C corps. So some of these pieces of information and advice might seem blatantly obvious. However, I feel like I need to say it, because I see clients bringing these types of returns in all the time that get audited, and it's clearly identifiable what caused those, caused an audit to occur in the first place. So I want to put [a] disclaimer
Disclaimer watch from 1:00
here that I'm not referring to my clients. I'm referring to the people who get audited and then come to me. Well, I guess technically they do become my clients, but these are people that I did not work on. They went [to] a different accountant or self-prepared, they made a mess, they're coming to me to fix it. So this is what I see from my experience, and I just want to share them with you. Okay, the first one: [is] not to use clean
Not to use clean figures watch from 1:25
figures for your expenses when you're trying to deduct them. So what does that mean? That means if you are trying to deduct, let's say, your cell phone, if you write cell phone expense 1,000, supplies expense 2,000, travel expense 5,000, it becomes blatantly obvious that it's just made up. I mean, there's a very improbable probability that the numbers just happen to break out like that, it's just a coincidence. However, in most cases it's
Using clean figures watch from 2:03
it's clearly, it's clearly obvious that it's just a lie. So if you're just gonna consistently use clean figures like that, it's, it's an audit risk. So the tax returns that you filed, they're just gonna run through a scanner, and then the IRS algorithms, when they're deciding who to audit, you know, they're gonna, they're gonna look out for that. And that's a scenario where it just, it just looks fishy. Like, if that's not obvious to you, please be aware of that. So please don't do that. I mean, it's ridiculous. However, I do see that happen all the time. Another thing, another one which is quite obvious, is [when] you make your profit break even to exactly zero. So what that means is, okay, you have your sales, your revenue, and then you have your expenses, your deductions, and when you have your sales and your deductions
Expense categories watch from 2:54
equal exactly out to zero, that looks fishy. Please be cautious. And again, perhaps that really did occur, but just know, even if that really did occur, that's an audit risk. So just be wary of that. Okay, another one are the expense categories themselves. So some will be questioned harder than others. For example, meals. I can't give you a dollar figure that's, that I'm gonna say that is a red flag, because it's in relation to your sales, it's in relation to your revenue. So what does that mean? So if you tell me, or if you ask me, there's 20,000 in meals, sounds too high, is that a red flag?
The answer is, with just that variable, that gross [dollar] value, I can't give you a yes or no. So let's say your sales are $50,000, then if you tell me 20,000 in meals, yes, that sounds very high, and that would be an audit risk. However, if you tell me that your sales are $800,000, then 20,000 in meals, now that does not sound high at all. If you tell me it's three million in sales, then 20,000 in meals, then actually that sounds quite low. So it really depends in relation to your sales. Okay, so another
Mileage watch from 4:13
field, another area that would get more scrutiny is mileage. So you know how, when you're filling out the business activity code on Schedule C, okay, they know what field you're in. So let's just say you want to claim twenty thousand miles. If you want to claim twenty thousand miles, does that seem high, yes or no? I wouldn't know. I need to know what field you're in. If you're in sales, or if you're a broker, like a real estate agent, then twenty thousand miles does not seem high. However, if you are a
Bookkeeping watch from 4:51
bookkeeper and you tell me 20 thousand miles, yes, that seems very high. So it just depends. So certain answers, it just depends. It just depends on, you know, what your profession is, what your field is. It depends in relation to your income, to your sales. So it just depends on those variables as well, so please take that into consideration. Another area, another expense that is more scrutinized, is the home office deduction. So perhaps you're
Exclusive Business Use watch from 5:22
gonna claim [it], you're supposed to take the square footage, and whatever you use exclusively for business, divided by the, the square footage of your home, then this [is] your business use percentage. You know, there's other ways to do it, there's the other methods, such as by rooms and, and whatnot. However, basically it's going by proportion to your home. So if you're going to claim something like 30 percent or even 40 percent, you're really pushing the boundaries, so just know that. Okay, if you really are utilizing [it] exclusively for business, 30 percent, forty percent or even twenty percent, I mean, that's on the higher end, but just be aware of that, that you might be challenged.
You know, that's an audit trigger, so be careful when you're using the home office deduction as well. However, if you truly are using the home office as your exclusive place of business, then you are entitled to use that, so absolutely take it. I would encourage you to take it. However, just be aware that, yes, using a higher percentage as your square footage for exclusive use of business does increase your audit risk. Just be aware of that. Okay, so in addition to these items that
Tax Forms watch from 6:35
would be on the Schedule C, you're also gonna have your ordinary tax forms as well, because you'll have, perhaps you'll have an investment income, you'll have stock sales, you'll have interest income, perhaps you have W-2Gs, things like that. Just know that if you receive that tax form, then so do the IRS. So if you don't report that, you know, they're gonna say, this taxpayer received this income on this tax form and it's in our system, but they didn't report it. If you don't report that, they're gonna clearly know. That's gonna be a, that's gonna be a, you know, IRS letter for sure, if, if the amounts are not insignificant.
So it'll be an IRS letter for sure, and it could potentially lead to an audit as well. You know, I'm not trying to scare you, but however, this is what happens. So if you get an IRS Form, obviously please report it. Okay, so those are some pieces of information, some pieces of advice. We hope that helps. If you found this useful, please feel free to give us a like or share. We'd highly appreciate that, and we will make more videos that we find are very applicable and useful to your lives, you know, as business owners, as taxpayers, and how to reduce your taxable income. So thanks for tuning in. We look forward to seeing you next time.
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