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The more complicated (for lack of a better term) your tax situation is, the more likely you are to be audited. For example, sole proprietors, who must fill out and submit Schedule C documents to the IRS, are more likely to be audited than someone who only has to worry about W-2s.
The Schedule C form is where sole proprietors list profit or loss from their business. A universal truth of audits is that the IRS is more likely to scrutinize a tax return that reports a six-figure profit. The chances of an IRS audit effectively double when a taxpayer files a Schedule C, and it rises with the level of income reported.
Just as reporting a large amount of income increases your chances of getting audited, reporting too little income on your Schedule C is another common trigger for IRS audits. A universal rule is that you should only report the income for which you have supporting documentation. Below, we’ll go over some other items on a Schedule C that may raise the attention of IRS investigators.
Claiming Losses in Consecutive Years
Every sole proprietor is entitled to a bad year (or several). However, continually claiming losses on your Schedule C forms might call into question your underlying motivations. Taxpayers are not permitted to deduct business losses unless they are actually operating their business as a for-profit entity. Otherwise, your “business” will be considered a hobby in the eyes of the IRS.
Claiming Business Use of a Vehicle
Using your vehicle solely for business purposes—even if it is your only vehicle—is another red flag for IRS investigators. Even if you work from home, it’s unlikely that you’ll never need to take a personal trip. Whatever mileage you claim on your car and truck expenses, be sure to have receipts documenting every trip.
Claiming Deductions for Travel and Meals
An occasional business lunch or dinner isn’t out of the norm for sole proprietors. However, IRS technology flagging larger-than-ordinary meal expenses has gotten more precise in recent years. It’s up to you to keep track of pertinent information for each business meal. Also, be sure to keep receipts for transactions of $75 or greater during overnight trips.
Be Ready to Hire An Attorney
The line between business and personal expenses for sole proprietors is easily blurred. Not every business owner files a Schedule C form, but those who do face a heightened risk of an IRS audit. No matter how thoroughly you document your deductions or how well you play by the rules, an audit is always possible. Before you say one word to IRS agents, call Weisberg Kainen Mark. We will aggressively protect your rights and, if necessary, mount a premium defense for you and your company.
Weisberg Kainen Mark, PL
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