If you consider yourself self-employed then the setup might be exciting and lucrative at the same time but it will also catch the attention of the audit division of the IRS. The agency does not have enough staff as well as budget last year and these are the very reason why only 0.70 per cent was audited from the entire individual tax returns. If you have a plan of filing a Schedule C due to business profit or loss, then you boost your chances of being investigated by the IRS.

Schedule C is the haven of tax deductions for those who are under the self-employed category. It is the same place where IRS considered as a gold mine because they have witnessed several times that self-employed individuals are claiming more than the deductions they deserve and some does not even report the entirety of their income. The IRS is investigating not just the small but high grossing sole proprietorship. Special investigation is given to those businesses that handle cash only such as hair salons, taxis, restaurants, bars and car washers.

Here are some of the red flags that could result to an investigation from the IRS:

  • Big deductions due to travel expenses, meals or entertainment. If the amount is too large then this is where they start questioning if the expenses are meant for business or pleasure. If you are to file such deductions, make sure that you have a record of the amount, the location, the attendees and the nature of the business or the meeting. If you spent more than $75, all receipts should be kept as well as those accommodation expenses. If you have no proper documents, don’t expect anything from your deduction at all.
  • Your chances of being audited increases as your income gets higher. Last year, the IRS investigated 0.65 per cent of the taxpayers who filed with an income lower than $200,000 while 1.70 per cent was inspected from those earning more than $200,000. For millionaires, around 5.83 per cent were audited last year.
  • Making too little is also a bad thing. If it happens for one year then it is understandable but if it happens yearly then the IRS will presume your business is just a hobby. This means that you are not eligible for any tax deductions because only businesses operations are considered tax deductible.

If you want to file tax returns without hassle every year, hire an accountant with investigation insurance to ensure that you are covered.