IRS Red Flags for Cash-Heavy Businesses (What Food Vendors Need to Know)

Lauren Twitchell
Sep 25, 2025
3 min read

If you run a food cart, food truck, or market stand, chances are you handle a lot of cash. Customers love handing you a $20 for a $12 meal, and in the rush, you don’t always log every transaction on the spot.

Here’s the thing: the IRS knows that.

In fact, cash-heavy businesses like food vendors are automatically considered higher risk. That doesn’t mean you’re doing anything wrong—it means agents understand how easy it is for sales to slip through the cracks. And if your books don’t add up, it can trigger questions you don’t want to answer.

As someone who worked inside the IRS, I can tell you: these red flags are real, and they can bring scrutiny fast.

This post will cover:

Why the IRS singles out cash-heavy businesses.
The specific red flags agents look for.
How you can audit-proof your business with clean bookkeeping.

Why the IRS Watches Cash-Heavy Businesses Closely

Cash is hard to track. Unlike card payments, there’s no automatic trail. That creates three risks in the IRS’s eyes:

Underreporting income. It’s easy to skim cash and report less than you actually earned.
Unverified expenses. Without receipts, cash payouts look suspicious.
Inconsistent records. Bank deposits, POS systems, and reported income don’t always align.

That combination makes food vendors “high risk” by default. It doesn’t mean you’re guilty—it means the IRS assumes mistakes are more likely, and they’ll dig deeper if they see inconsistencies.

Red Flag #1: Deposits Don’t Match Reported Sales

This is the biggest trigger. If you report $80,000 in annual sales, but your bank deposits add up to $100,000, the IRS notices.

Why? Because they get 1099-K forms from Square, Toast, PayPal, and other processors that show your gross sales. If your tax return doesn’t match, it raises suspicion immediately.

Red Flag #2: “Too Low” Profit Margins

IRS agents know the average margins for food vendors. If your expenses look unrealistically low compared to your sales, it can signal underreported cash payouts or untracked costs.

For example:

Reported sales: $100,000
Reported expenses: $20,000
Profit margin: 80%

For most vendors, that number is way too high. An agent will ask: “Where’s the rest of the expenses?”

Red Flag #3: Poor Cash Logs

If you can’t show where cash went—supply runs, event fees, or personal withdrawals—it looks like unreported income.

IRS auditors love asking for “cash activity logs.” If you don’t have one, you’re in trouble.

Red Flag #4: Mixing Personal and Business Money

Taking $50 from the till for groceries, or using personal accounts to pay vendor fees, muddies the waters. The IRS sees mixed accounts as sloppy and potentially dishonest.

Red Flag #5: Missing or Inconsistent Records

Food vendors often forget to keep:

Festival invoices
Commissary rental receipts
Supply purchase logs

When records are missing, the IRS may estimate your income using industry averages—and that usually works against you.

What an IRS Audit Looks Like for Food Vendors

Here’s the reality. If an agent audits you, they’ll:

Compare your bank deposits, POS reports, and reported sales.
Ask for receipts, logs, and supporting documentation.
Estimate your income using food cost ratios if records don’t add up.

If they think you’re underreporting—even unintentionally—you may owe back taxes, penalties, and interest.

How to Audit-Proof Your Food Business

The good news? You can run a cash-heavy business without living in fear of the IRS. Here’s how:

Keep Daily Cash Logs. Every payout, withdrawal, and cash expense should be logged immediately.
Reconcile Weekly. Match your POS, cash logs, and bank deposits so everything lines up.
Save Every Receipt. Commissary fees, festival costs, supplies—scan or snap photos for digital backup.
Separate Business and Personal. Don’t mix. Ever. Have a business bank account and keep it clean.
Get Help When Behind. If your records are already messy, a cleanup service can untangle them before tax season.