Aug 11, 2023
12 Red Flags for Self-Employed People
Taking Excessively Large Deduction on Schedule C
Making a lot of Money
Writing off a loss from a hobby
Big Deductions for Meals, Travel and Entertainment
Claiming the Home Office Deduction
Claiming 100% Business Use of a Vehicle
Claiming Rental Losses
Taking the Research and Development Credit
Claiming Day Trading Losses
Operating a Marijuana Business
Failing to Report Certain Professional Earnings as Self-Employment Income
Receiving Lots of Cash
Being in business for yourself can be exciting and lucrative, but it can also make you a target for the IRS. The IRS audits less than 1% of all individual returns, but the odds of being audited go up significantly if you file a Schedule C to report profit or loss from a business.
Schedule C is a treasure trove of tax deductions for self-employed people, but it's also a gold mine for IRS agents. Agents know from experience that self-employed people sometimes claim excessive deductions and don't report all their income. As a result, the IRS is more likely to audit Schedule C returns than other types of returns.
The IRS looks at both higher-grossing sole proprietorships and smaller ones. Special scrutiny is given to cash-intensive businesses, highly profitable companies, 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).
According to a 2019 study by the National Bureau of Economic Research, Self-Employed African Americans are more likely to be audited by the IRS than white Americans. The study found that African Americans were 2.8 times more likely to be audited than white Americans, even after controlling for income, filing status, and other factors.
The study's authors suggest that this disparity may be due to racial profiling by the IRS. They also point out that African Americans are more likely to be self-employed, which makes them more likely to be audited.
The IRS has acknowledged that there is a racial disparity in audits, but it has said that it is committed to addressing the issue. The IRS has created a new office of diversity, inclusion, and civil rights, and it has implemented a number of new policies to try to reduce the disparity.
However, the disparity persists. In 2021, African Americans were still 2.2 times more likely to be audited than white Americans.
The IRS audit disparity is a serious problem that has a significant impact on African Americans. It is important to address this disparity and to ensure that all Americans are treated fairly by the IRS.