The IRS is on the hunt for taxpayers who year after year report large losses from hobby-sounding activities to help offset other income, such as wages, or business or investment earnings. Sorry to inform you, but you're a prime audit target if you report multiple years of losses on Schedule C of the Form 1040, run an activity that sounds like a hobby and have lots of income from other sources. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction. Be sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. That's because these vehicles are eligible for more favorable depreciation and expensing write-offs. The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. IRS agents know that it's rare for someone to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. Ditto for business owners who report substantial losses on Schedule C, especially if those losses can offset in whole or in part other income reported on the return, such as wages.Īlso, claiming 100% business use of a vehicle is a prime audit red flag. Sole proprietors reporting at least $100,000 of gross receipts on Schedule C and cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like) have a higher audit risk. The IRS looks at both higher-grossing sole proprietorships and smaller ones.
But it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don't report all their income. Schedule C is a treasure trove of tax deductions for self-employed people.
You just need to understand that the more income shown on your return, the more likely it is that the IRS will be knocking on your door. We're not saying you should try to make less money - everyone wants to be a millionaire. Revenue agents take a kitchen-sink approach in auditing these individuals by reviewing not only their 1040 returns, but also returns of entities they control, both foreign and domestic. This specialized group within the IRS tackles examinations of the super-rich. The IRS's high-wealth exam squad is even getting back into the action. The IRS will be hard pressed to keep this promise, but it's too soon to know for sure. Treasury officials have made a big promise, saying that taxpayers earning under $400,000 won't see increased audit rates relative to recent years. The Treasury Department and the IRS say that the enforcement funds will be used in part to audit more high-net-worth individuals and pass-through entities, such as LLCs and partnerships, among other taxpayers. Remember, IRS is getting more money for audits, with $45.6 billion of its $80 billion in extra funding over 10 years dedicated to enforcement activities and collection measures. While the overall individual audit rates are extremely low, the odds increase significantly as your income goes up (especially if you have business income). Most of the enforcement effects from IRS's $80 billion windfall won't be felt by taxpayers for at least a couple of years. It will take the IRS time to hire experienced examiners and to train them to audit complicated tax returns.
Also, increased audits won't happen overnight. Plus, most audits are handled solely by mail, meaning taxpayers selected for an audit typically never actually meet with an IRS agent in person. In recent years, the IRS has been auditing significantly less than 1% of all individual tax returns. Most people can still breathe easily, however, because the vast majority of individual returns escape the audit machine. Your fear might be heightened, knowing that the Inflation Reduction Act passed last year gives the IRS $80 billion in extra funds over 10 years, with a large chunk of that money to be used by the agency for increased enforcement activities. As you're getting ready to file your tax return, you may be wondering about the chances that the IRS will audit your return.
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