Top 5 Audit Red Flags Insurance Underwriters Should Not Ignore

Article | July 10, 2025

Authored by Your Firm LLC

Less than one percent of individual tax returns are audited each year, yet the IRS’s data analytics mean certain businesses rise to the top of the pile. For closely held companies and sole proprietors, even a routine correspondence audit can devour time, cash flow, and credibility with lenders or investors. Below are five red flags our Audit & Assurance team at MBN & Company LLP most frequently sees tripping up small businesses—along with actions you can take to stay out of the IRS spotlight.

Over-aggressive business deductions. Mileage, home-office space, and mixed-use assets (think laptops and cell phones) are magnets for scrutiny when the numbers dwarf industry norms. “The IRS’s Discriminant Information Function score quickly flags expenses that don’t match your revenue profile,” notes Don Breckenridge, CPA, Audit & Assurance Partner at MBN & Company. “If you can’t tie every mile or square foot to real business activity, you’re inviting questions you don’t want to answer.”

Missing 1099-K, 1099-NEC, or W-2 income. Payment platforms, vendors, and payroll providers send identical forms to you and the IRS. Any mismatch can trigger a CP2000 notice. A quick year-end reconciliation of these documents against your books is essential.

Disproportionate charitable contributions or refundable credits. Generous gifts and refundable credits like the Employee Retention Credit (ERC) are perfectly legal—but only when properly documented and eligible. The IRS has already opened nearly 500 ERC investigations for 2024, with penalties running into the millions. Breckenridge warns, “If your donation or credit is more than 10 percent of revenue, assume the IRS will ask for proof—be ready with receipts, bank records, and eligibility memos.”

Cash-heavy or crypto transactions. Restaurants, salons, and other cash-intensive businesses fall under tighter surveillance. Now add digital assets: the new Form 1040 checkbox makes non-reporting practically an admission of guilt. Robust point-of-sale controls and a separate crypto ledger are no longer optional.

Entity structure that doesn’t fit operations. Sole proprietorships and single-member LLCs are audited at significantly higher rates than S-corps or partnerships. The right structure can both limit exposure and streamline compliance costs. Our advisors routinely model tax savings against payroll and legal expenses so clients choose the status that truly supports growth.

How MBN & Company Can Help

Ranked among the nation’s Top 100 firms, MBN & Company delivers audits that go beyond the checklist, leveraging data analytics to benchmark your expenses against peers and pinpoint blind spots before the IRS does. Our 80+ CPAs, backed by award-winning client satisfaction scores, work across 13 Mid-Atlantic offices yet remain just a phone call away. Whether you need a pre-filing “stress test,” help reconstructing mileage logs, or guidance on ERC documentation, our Audit & Assurance specialists stand ready.

As Breckenridge puts it, “An audit doesn’t have to be a crisis. With the right controls and a proactive review, you transform risk into an opportunity to strengthen your financial story.” Let our team move you forward—before the IRS asks first.

Next Step: Contact our Audit & Assurance department today at 800-987-4321 or visit mbnco.com to schedule a complimentary 30-minute audit-readiness consultation.