“Red flags” that can trigger an audit for the self-employed

On Behalf of | Jan 31, 2023 | Tax Law |

There’s been a lot of buzz about the fact that the IRS has been hiring lately, and that has a lot of sole proprietors and contract workers concerned about the possibility of audits in the future.

A lot of that has to do with the fact that sole proprietors and contract workers often do their own bookkeeping and taxes, and the labyrinth of rules they have to follow can be confusing at best. While tools like QuickBooks might keep you organized if you’re in this spot, they won’t necessarily help you avoid triggering an audit.

If you want to keep yourself off the IRS’s radar, learn more about the “red flags” that draw attention to your tax returns.

3 things that attract attention from the IRS

Every situation is different, but some of the most common ways self-employed workers end up talking to revenue agents include:

1. Trying to pass a hobby off as a business. If your business makes a profit three out of every five years, it’s presumed to be an actual business – not a hobby. If you have too many years where you’re in the red, however, the IRS may start questioning whether you’re really operating for profit or simply trying to deduct an expensive hobby.

2. Overly high deductions for meals and travel expenses. The ability to write off your working lunches or all those meals you take in coffee shops to use their wifi is important, but you need to be careful that you can justify each expense. Track who was there, how it related to your business and other details so you can back up your claim.

3. Claiming your car is 100% for use in your business. This is a fair deduction to take when, for example, you have a delivery van that you use exclusively to drop off your homemade bakery products – but you’d better have a personal car for ordinary errands.

If you’re facing an audit, don’t panic. Instead, find out more about the resources available to you and get some experienced legal guidance.