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Audit Red Flags for Self-Employed Taxpayers

Self-employed taxpayers who use Schedule C have a higher audit risk than other taxpayers. You have the right to claim all of your ordinary and necessary business expenses as a deduction, but the IRS is also more likely to select your return for a tax audit.

Your best strategy is to be aware of the increased audit risk and avoid the following audit red flags for entrepreneurs.

Home Office Deductions

You should take the home office deduction if you qualify for it. However, the deduction should only be taken for the area of your home used exclusively for business.

If you are claiming that a large percentage of your residence is used as a home office, expect your risk of a tax audit to increase.

Excessive Deductions

If your deductions are disproportionately large when compared to your income, make sure you follow these two tips:

  • Only claim the deductions if they are ordinary and necessary in your business. Ask a tax professional if you aren’t sure whether you should be taking the deductions.
  • Have proof of your deductions by keeping receipts, invoices, or other financial records.

If your business is making little money because of excessive deductions, the IRS may become suspicious. If you are claiming a loss, you may run the risk of having your business classified as a hobby, which will disqualify you from claiming any deductions. You can meet the safe harbor to avoid the hobby loss rules by making a profit within three of the past five years.

Mismatched Numbers

If you receive a Form 1099 from a client, the IRS is also getting a copy. Make sure the numbers on your tax return match the numbers on your 1099 exactly.

The same logic applies to a W-2, 1099-K, or any other tax form you receive. IRS computer programs can easily catch a discrepancy between your tax return and an informational tax form.

If you make this error on your tax return, the IRS may wonder what other errors you made. Contact a tax attorney if you receive an audit notice from the IRS and need audit defense assistance.

The Gartzman Law Firm can help you with tax audits and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.