Case Study: When the Numbers Don’t Match

How Inconsistent Income Reporting Can Trigger an Audit

One of the most common audit triggers we see isn’t aggressive deductions or complex tax strategies—it’s income that doesn’t match across filings. Many business owners don’t realize how much information is shared between agencies, or how easily discrepancies can be flagged.

In several recent cases, business owners were referred to our firm after receiving audit notices tied to the same underlying issue: income reported in one place didn’t align with income reported somewhere else. Situations like these are more common than many people realize—and they often begin with simple reporting inconsistencies.

A Common Misconception: “The IRS and the State Don’t Communicate”

One business came to us after receiving an IRS audit notice related to their business income. As we worked through the audit process, it became clear that the trigger wasn’t their federal tax return alone—it was their sales tax filings.

Here’s what happened:

• The client filed sales tax returns with their state reporting gross sales

• On their federal tax return, their reported gross business income was lower

• The state shared sales data with the IRS

• The IRS compared the two figures and flagged the discrepancy

The business owner was surprised to learn that state agencies and the IRS regularly share information. While many people assume these systems operate independently, the reality is that they are increasingly interconnected.

In this case, the IRS didn’t assume wrongdoing—but it did assume the numbers needed to be explained. That explanation then became the responsibility of the business owner during the audit process.

Another Audit Trigger: 1099 Income Not Matching Reported Sales

In another situation, a business owner was referred to our firm after receiving an audit notice related to 1099-NEC and 1099-MISC forms.

During the review, we discovered:

• The business had received multiple 1099s from clients and platforms

• The total income reported on those 1099s was higher than the gross income reported on the tax return

• The IRS system automatically compared the two figures

Because not all of the 1099 forms had been provided to the original tax preparer, the tax return had been prepared using only the income the client believed was correct. Unfortunately, the IRS doesn’t rely on belief—it relies on data.

Why This Happens More Often Than You Think

Many business owners unintentionally create discrepancies because they:

• Don’t provide sales tax reports to their accountant

• Forget about smaller or unexpected 1099s

• Assume income reported elsewhere doesn’t affect their tax return

• Rely solely on bookkeeping reports without cross-checking external filings

If an accountant only uses the income figures provided without verifying them against other reported sources, discrepancies can easily go unnoticed until an agency flags them.

Our Approach: Proactive, Not Reactive

Situations like these are exactly why we take a proactive approach when working with clients.

When preparing tax returns, we don’t just focus on getting the forms filed—we consider how the IRS and state agencies will view the return. We utilize various resources that highlight common audit triggers, including:

• Sales tax gross sales compared to reported business income

• 1099 income matching what’s reported on the return

• Inconsistencies between different filings tied to the same business

By applying this level of review during tax preparation, we aim to:

• Ensure income is reported accurately and consistently

• Reduce the likelihood of audit notices

• Minimize liability and stress for our clients

This type of cross-check isn’t always part of standard tax preparation, but we believe it’s an essential part of protecting business owners.

The Takeaway: Accuracy Across the Board Matters

An audit isn’t always about doing something wrong. Often, it’s simply about numbers that don’t line up.

Providing all tax forms received—including:

• Sales tax reports

• 1099-NEC and 1099-MISC forms

• Any other third-party income statements

allows your accountant to prepare a return that reflects the full financial picture and can stand up to scrutiny.

When income is consistent across filings, you dramatically reduce the risk of unwanted attention from the IRS.