No one starts a therapy practice thinking about tax audits.

But whether you’re working solo or running a growing group practice, your business structure and financial habits can raise red flags, especially with the IRS and insurance companies keeping a closer eye on healthcare providers.

The good news? Avoiding an audit doesn’t require fancy software or an accounting degree.

You just need the right systems, a few non-negotiable habits, and clarity around what counts as legit business activity (and what doesn’t).

Let’s break down the simple but critical ways to avoid audit risk as a therapist.

The silent audit risk hiding in your salary

If you’ve filed your taxes as an S Corporation (which many therapists rightly do), there’s one rule the IRS cares a lot about: taking a reasonable salary.

Here’s where it goes sideways: too many therapists either skip payroll entirely or pay themselves way too little.

Pulling money from your business account isn’t the same as taking a salary. That’s called a distribution (or a draw). If you’re not paying yourself through payroll — with taxes withheld and W-2s filed — the IRS sees that as a red flag.

Set yourself up on proper payroll. Make it routine. Make it realistic. And make sure your compensation reflects the value you bring to your practice — because to the IRS, it should pass the smell test.

Your documentation can make or break you

In an audit, you’re guilty until your records prove otherwise. That means your documentation game has to be airtight.

At a minimum, you should have:

• A dedicated business checking account (no personal purchases allowed)
• Business-only credit cards
• Receipts or digital records for every expense
• Statements that trace all income and outgoings back to your business accounts

And don’t toss those records too soon — you’ll want to keep everything for 6 years, just in case. Most banks and platforms archive statements that long, but double-check your access just to be safe.

Insurance, payroll, and multiple revenue streams: What compliance looks like

If you’re billing insurance, there’s actually a built-in paper trail working in your favor. Most insurance companies issue 1099s at year-end. Just save those, and you’re good.

Running payroll? Your payroll platform should give you downloadable reports and filings anytime you need them.

But here’s where therapists often slip up: mixed or “off the books” income.

Whether you’re offering coaching, selling courses, or doing sliding scale cash sessions, every dollar of income should land in your business bank account — not your Venmo, not your personal checking, not your back pocket.

Clean books start with clean income flow. And if you’ve got multiple revenue streams, use your bookkeeping to track them separately. That makes it easy to show auditors (or lenders, or yourself) where your money’s coming from and proves you’re running a professional, legit operation.

Why DIY spreadsheets aren’t good enough

Let’s be real: the IRS doesn’t care about your color-coded Excel doc.

One of the best ways to avoid audit risk as a therapist is also the most boring: bookkeeping.

Proper, reconciled, up-to-date books are your strongest defense. Not just for taxes — but for answering audit letters, tracking profit, and even knowing whether you can afford that new hire or office upgrade.

Yes, that means using real accounting software (or hiring a pro). No, that $1,200 IKEA couch probably won’t fly as a deductible business asset.

Red flags that catch the auditor’s eye

So what actually triggers an audit? It’s not always random. Therapists can land on the radar for a few predictable reasons:

• No payroll on file despite an S Corp setup
• Mixing personal and business expenses (like writing off your own therapy sessions or clothing)
• Claiming unusually high deductions for your income level
• Missing 1099s or unreported income
• Messy or incomplete documentation

And when your tax return looks “off,” that’s when the audit letters start showing up.

Insurance audits are no different. Medical billing red flags like missing CPT codes, duplicate charges, or vague treatment documentation can trigger claw backs — and some carriers are getting more aggressive with AI-powered compliance checks.

What helps if you do get audited

First off: don’t panic.

Audits are stressful, but they’re survivable — especially if your records are in order.

If you get that dreaded letter, here’s what to do:

• Respond promptly and professionally
• Provide only what they ask for (no more, no less)
• Be ready to show clean documentation, from tax returns and payroll remittances to treatment notes and billing codes
• Work with a CPA or billing specialist who understands therapy practices — they’ll help you respond correctly and protect your interests

What makes it worse? Trying to justify personal expenses, guessing your numbers, or scrambling last-minute to fix years of messy records.

If your return “passes the smell test” and your bookkeeping backs it up, you’re far less likely to face penalties or prolonged review.

Your next step: tighten up before trouble hits

The time to think about audit risk isn’t after you get a letter.

It’s now, while you still have full control over your books, your billing, and your banking habits.

A few smart changes today can save you a world of stress later on.

If you’re ready to get serious about your practice’s accounting — and finally take audit worries off your plate — our team is here to help.