IRS Red Flags for the Self-Employed

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I get it. Dealing with the IRS is stressful. Did you know that being self-employed and filing a Schedule C on your tax return draws attention to the IRS? Here are some audit triggers to avoid.

Claiming a Home Office Deduction

The IRS is drawn to returns with a Schedule C loss that includes the home office deduction. Why? Because it’s an easy win for the IRS to take it off your return. So, if you are going to take the deduction, make sure you have an “exclusive use” area of your home that is only used for your business. It’s hard to successfully claim a guestroom or playroom, even if you do have a space for your work.

Claiming 100% Business Use of a Vehicle

Another red flag that attracts the IRS like a shark to bloody water. They know it’s rare for someone to actually use a vehicle 100% for business. Especially when there isn’t even a second car available for personal use. Make sure you keep a detailed mileage log – sloppy recordkeeping could result in a disallowed deduction.

Large Deductions for Meals, Entertainment, & Travel

Again, no sloppy recordkeeping! Keep your notes on people in attendance, the business purpose, and what you talked about. When your deductions are too high, it makes the IRS question if you are trying to take personal expenses for your business. Another reason why it’s important to keep separate bank accounts.

Making More than $100,000 of Gross Receipts

Obviously, we don’t want you to try to make less money. Just know that making a high income puts you in the IRS crosshairs since wealthy individuals are going to be audited at a higher rate than in the past. Not to sound like a broken record, but no sloppy recordkeeping.

Not Making Money

If you are reporting large losses year after year, you’ll be on the IRS radar. Especially if those losses are offsetting other income reported on your return. Basically, you can’t take business losses for a hobby. To qualify as a business and not a hobby, your business has to generate profit three out of five years and you have to run the activity like and actual business. The burden to prove anything is in your hands. Keep supporting documents and keep your business finances separated from your personal.

There’s no telling what may or may not trigger an IRS audit. Just remember to report all of your income and keep all documentation to support your deductions. Bonus points for keeping your finances separate!

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