Three audit types
(1) Correspondence audit: IRS letter asking for documentation on one or two issues. Most small-business audits are this type. (2) Office audit: in-person at an IRS office. (3) Field audit: IRS revenue agent visits your office or representative's office. Field audits are more common for larger or more complex returns.
Statute of limitations
Generally three years from the return due date. Six years for substantial omissions of income (>25%). Indefinitely for a fraudulent return or a return that was never filed. Keep records for at least the statute period plus a buffer.
Common audit triggers
Schedule C losses several years in a row. Round numbers throughout the return. Large home-office or vehicle deductions disproportionate to income. Mismatch between 1099-K/1099-NEC totals and Schedule C gross receipts. Cash-intensive businesses. High charitable contribution deductions relative to income.
Representation
You can represent yourself, but for anything other than a simple correspondence audit, hiring a CPA, EA, or attorney is usually worth the cost. They can speak with the IRS on your behalf (Form 2848 power of attorney), narrow the audit scope, and prevent self-incriminating answers.
During the audit
Provide only what is requested — no more. Be courteous but minimize informal conversation. If you don't know an answer, say so and offer to research and respond in writing. Maintain organized records that tie to your return. Push back politely on disallowed deductions when supported by records and law.
Where the IRS publishes guidance on this topic
The IRS publishes a layered set of free resources on most small-business tax topics: a relevant publication (usually one of Pub 334, 463, 535, 587, 946, 560, or 583), the instructions to the relevant form, the "Small Business and Self-Employed Tax Center" landing pages on IRS.gov, and the Audit Techniques Guides written for IRS examiners. Reading the agency's own materials is the cheapest tax education available. They are written in plain English, updated annually, and they reflect exactly the framework an examiner will apply if your return is selected.
How experienced filers approach this
Experienced self-employed filers and the CPAs who advise them treat this question as a recurring planning exercise rather than a one-time decision. They model the multi-year tax impact rather than just the current year, document the reasoning in a short workpaper that survives staff turnover and software changes, and revisit the analysis annually as facts and laws change. The discipline is not difficult — a half-day in January with last year's return, the current-year IRS publications, and a spreadsheet — but it is rare among DIY filers, which is precisely why it produces outsized results.