Being in business for yourself can be exciting, lucrative â and a great way to draw the attention of the IRS’s audit division. Short on personnel and funding, the IRS has audited significantly less than 1% of all individual returns in recent years. But if you file a Schedule C to report profit or loss from a business, your odds of drawing additional IRS scrutiny go up.
Schedule C is a treasure trove of tax deductions for self-employed people. And it’s also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don’t report all their income. The IRS looks at both higher-grossing sole proprietorships and smaller ones. Special scrutiny is given to cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like), people with freelance service gigs through the sharing economy (think of Uber and Grubhub), and small-business owners whose Schedule C’s report a substantial net loss (especially if those losses offset in whole or in part other income reported on the return, such as wages or investment income).If you want to avoid the wrath of IRS auditors, take a look at these 11 filing scenarios that could attract unwanted IRS attention. Doing so now could save you a lot of time and money down the road.
- SEE MORE Most-Overlooked Tax Deductions and Credits for the Self-Employed