IRS Insider: Why Inconsistent Income Raises Questions

As a former IRS Agent, I can tell you this:It’s not always how much money you make that draws attention—it’s the pattern of your income.

For Etsy sellers, tradespeople, and solopreneurs alike, inconsistent income doesn’t automatically mean trouble. But when your books show unexplained spikes, missing months, or irregular reporting, it raises questions—especially during an audit.

Let’s break down what “inconsistent income” really means from an IRS perspective, and how you can protect yourself with clean, transparent records.

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1. What the IRS Sees When It Looks at Your Income

When an IRS examiner reviews your file, they’re not just looking at your total income—they’re looking for consistency.

The agency uses computer matching and trend analysis to see:

• Whether your 1099-K, 1099-NEC, or 1099-MISC forms match your return.

• Whether your reported income is in line with prior years.

• Whether your bank deposits tell the same story as your bookkeeping.

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When the numbers don’t follow a logical rhythm—or when income suddenly drops off without a clear reason—it creates what auditors call a discrepancy signal.

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2. Inconsistent Doesn’t Mean “Bad” — But It Must Be Explained

Here’s the key: the IRS understands that small businesses have slow months, seasonal swings, or emergencies. What they don’t understand is missing documentation.

Examples that make sense:

✅ Your Etsy sales dip every January after the holiday rush.

✅ A contractor’s income fluctuates with weather or client demand.

✅ A freelancer takes maternity leave or pauses projects for travel.

Examples that raise concern:

🚩 A six-month gap in deposits with no note or invoice record.

🚩 Unusual cash deposits with no source.

🚩 Sales that appear underreported compared to 1099 forms or payment processors.

In audits, you don’t need perfection—you need explanation.

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3. The IRS’s Favorite Tool: The Bank Deposit Analysis

When income looks inconsistent, auditors go straight to your bank deposits.

They add up every deposit, compare it to your reported gross receipts, and ask one question:

“Where did this money come from?”

If your books clearly show that Etsy payouts, client checks, or Zelle payments tie to actual sales and invoices, you’re fine.If they don’t—it becomes your burden to prove those deposits weren’t income (like transfers, refunds, or personal cash).

That’s why reconciliation matters so much. It’s not just bookkeeping—it’s audit defense.

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4. Why Bookkeeping Gaps Look Like Income Gaps

Most “inconsistencies” aren’t fraud—they’re bookkeeping gaps.

If you miss recording a refund, a voided sale, or a month of Etsy fees, your profit can look inflated. Likewise, if you skip recording deposits that happened at month-end, it can appear like income vanished.

From an auditor’s point of view, that looks suspicious.From your point of view, it’s just a missed entry.

The fix is simple: consistent, month-by-month tracking.

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5. What Auditors Really Want to See

When I worked cases inside the IRS, clean books always spoke louder than explanations.

Here’s what earns instant credibility:

• Consistent bookkeeping (same format each month)

• Matching totals between sales platforms and bank deposits

• Clear notes for refunds, delays, or unusual activity

• Receipts and documentation for major gaps

When your records tell a clear story, the IRS stops asking questions.

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6. A Real-World Example

One Central Florida Etsy seller I helped had perfect sales records—but she never recorded the Etsy deposits in her bank ledger.

To her, it was obvious that the income came from Etsy. To the IRS system, it looked like she had $32,000 in “unexplained deposits.”

By reconciling her monthly payouts and attaching Etsy statements, we cleared the entire issue.

No penalties. No follow-up. Just proof.

That’s the power of clarity.

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7. How to Avoid Inconsistency Red Flags

Here’s your checklist for staying audit-safe:

✅ Track income monthly — even if you’re behind, start fresh this month.

✅ Reconcile Etsy payouts or client payments to your bank.

✅ Document refunds, returns, and downtime clearly.

✅ Separate personal and business funds.

✅ Explain changes in income in your notes or spreadsheet.

Small steps now prevent big questions later.

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8. When It’s Time to Call a Pro

If you’ve had months of irregular deposits, unexplained income, or a 1099 mismatch, it’s not too late to fix it.

Our Cleanup Packages (and bookkeeping cleanups for all small businesses) help rebuild the missing months, reconcile accounts, and align your books before year-end.

👉 Learn more about cleanup services here 

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Inconsistent income doesn’t make you suspicious—but messy records can.

When your books tell the same story your bank does, you take control of the narrative before anyone else does.