Being self-employed comes with many freedoms—flexibility, independence, and full control over your income. But with those perks also comes increased scrutiny from the IRS. In 2025, as the IRS ramps up enforcement efforts and deploys AI tools to identify discrepancies in tax returns, self-employed individuals must be more diligent than ever.
At Hughes, Snell & Tuscan, we work with freelancers, consultants, gig workers, and small business owners across Florida to help them navigate these complexities. If you’re filing a Schedule C or running your own operation, understanding IRS audit red flags can help you stay compliant—and protect your income.
Why Are Self-Employed Taxpayers Audited More?
Self-employed taxpayers report their own income and expenses, making it easier (intentionally or not) to misreport. According to the IRS, underreporting of business income is one of the biggest areas of the tax gap—the difference between taxes owed and taxes paid.
With increased IRS funding through the Inflation Reduction Act, tax authorities are targeting high-risk returns. That makes 2025 a critical year for due diligence.
Top 10 IRS Audit Triggers for Self-Employed Individuals
1. High Income with Low or No Tax Liability
If you’re reporting a high gross income but paying little in taxes due to aggressive deductions, the IRS might take a closer look.
Tip: Ensure your deductions are legitimate and well-documented. Maintain clear records of business use for all claimed expenses.
2. Excessive Deductions Relative to Income
Claiming large deductions—especially for travel, meals, entertainment, or home office use—that are disproportionate to your income raises a red flag.
Watch Areas:
● Travel to “business” conferences that resemble vacations
● Lavish meals without clear business purpose
● Questionable home office deductions (especially without exclusive-use justification)
3. Rounded or Repetitive Numbers
Listing expenses in perfect, round numbers ($1,000, $500, $5,000) can indicate estimates rather than actual costs.
Tip: Use precise figures backed by invoices, receipts, or bank statements. Consistency helps validate legitimacy.
4. Large Cash Transactions
Self-employed individuals who deal in cash—like barbers, personal trainers, or food truck owners—are more likely to be audited due to the difficulty in verifying income.
Tip: Deposit all income into business bank accounts and issue receipts. Consider using bookkeeping software that tracks both cash and card income.
5. Misclassifying Workers
Hiring independent contractors instead of employees can save on payroll taxes, but misclassification can result in penalties and back taxes.
Red Flag: If a contractor works full-time hours under your supervision, the IRS may view them as an employee.
6. Failing to Report All Income
If a client or platform files a 1099-NEC or 1099-K on your behalf and you fail to include it, the IRS will notice.
Tip: Reconcile all forms before filing. Use tax software or an advisor to ensure your gross income matches IRS records.
7. Claiming 100% Business Use of Vehicle
While your car may be vital to your work, rarely is it used exclusively for business.
Tip: Use mileage logs or apps like MileIQ to track business-related travel and calculate your deduction accurately.
8. Home Office Deductions Without Proof
Claiming a home office can be legitimate, but it must meet the “exclusive and regular use” test.
Red Flag: Using a kitchen table or spare bedroom part-time may not qualify.
9. Business Losses Year After Year
Consistently claiming losses may cause the IRS to reclassify your activity as a hobby rather than a business.
Tip: Keep detailed records showing intent to earn a profit—such as marketing, customer acquisition, and business planning efforts.
10. Large Charitable Contributions Relative to Income
Donating a large portion of your income may raise eyebrows—especially if you also have a low reported net income.
Tip: Always get written documentation from the charity and report accurately.
How the IRS Is Using AI in 2025
The IRS is now employing AI-based systems to detect inconsistencies and anomalies in returns. These tools cross-reference:
● Your reported income with 1099 filings
● Industry averages for deductions
● Spending patterns vs. declared income
Why it matters: These systems flag high-risk returns for manual review, increasing the chances of audit without human bias.
Best Practices to Stay Compliant
Keep Meticulous Records
● Save receipts for every business expense
● Track income from all sources
● Maintain a separate business bank account
Use Accounting Software
Platforms like QuickBooks, FreshBooks, and Wave can automate categorization and make reporting accurate and defensible.
File On Time and Pay Estimated Taxes
Missed payments or filings are audit triggers. Mark quarterly estimated tax deadlines in your calendar.
Work With a Tax Professional
An advisor ensures your return is accurate, strategic, and compliant—especially if you’re scaling your business or dealing with complex deductions.
What Happens If You’re Audited?
If the IRS audits your return, you’ll be asked to provide documentation supporting your claims. This can include:
● Receipts and invoices
● Mileage logs
● Proof of payments
● Contracts or client communications
Pro Tip: Respond promptly and professionally. If you’re unsure how to proceed, contact Hughes, Snell & Tuscan for audit representation and support.
Final Thoughts
Being self-employed gives you freedom, but also responsibilities—especially when it comes to taxes. In 2025, with the IRS increasing enforcement, it’s crucial to understand what draws attention and how to avoid unnecessary scrutiny.
At Hughes, Snell & Tuscan, we help self-employed professionals across Florida manage their finances confidently and stay on the right side of the IRS. Whether you’re a freelancer, entrepreneur, or contractor, we can help you build a tax strategy that works for you—legally and efficiently.
Need help preparing for tax season or worried about audit risk? Contact Hughes, Snell & Tuscan today for expert support tailored to your business.
