- Days left

Does Filing a Schedule C Make Me the Target of an Audit?

For the fiscal year 2009, about one out of every 100 taxpayers were chosen for an audit. In terms of numbers, 1.4 million taxpayers were selected for either a correspondence or a personal audit. Statistically, those are pretty good odds for taxpayers.



While there's no magic formula to determine what can trigger an audit and what doesn't, there are some patterns that seem to be pervasive. One pattern that causes alarm among small business owners is the frequency of audits of taxpayers who file a Schedule C. So, does filing a Schedule C make you an audit target? Well, yes and no.Statistically, taxpayers who file a Schedule C are two to four times more likely to be audited. This may, however, have to do with the nature of what's on your Schedule C than the actual schedule.

For example, high-income taxpayers tend to be audited more often than low-income taxpayers. Many tax professionals recommend that taxpayers who are collecting substantial income from a small business consider incorporating in order to avoid filing a Schedule C, which attracts attention.

Additionally, taxpayers who file a Schedule C have more issues with record-keeping. By its nature, the schedule is an information-heavy schedule -- there are items of income and deductions. This opens the door for more mistakes and potential abuse, especially when it comes to generating losses. The IRS estimates that as many of 70% of taxpayers who report net losses on a Schedule C have artificially inflated expenses to create losses. If you're reporting losses on your Schedule C every year (especially for three or more years in a row), you might catch the attention of the IRS.

Many taxpayers who file a Schedule C may receive income from multiple sources. This increases the chances that you might omit income on a form 1099 or otherwise make a reporting error. Considering the IRS tends to crosscheck your information forms (like forms 1099 and W-2), forgetting to report income can cause the IRS to carefully examine the rest of your return.

To keep your chances of audit low when filing a Schedule C, keep good records and properly report your income and deductions. Be scrupulous and meticulous -- don't ballpark income and deductions. Round numbers may signal that you're taking guesses rather than reporting accurately.

Some tax professionals also recommend incorporation in order to keep your business records completely separate from your personal records. This may also offer you other benefits, including reducing your liability. If either of these issues are a concern, consult with an attorney to find out if it makes sense for you.

That said, don't let the tax tail wag the dog. Running a business can be tough enough (trust me, I know) without adding audit worries into the mix. Keep excellent records, seek professional help if you need it and above all, if you do get audited, understand that it's not the end of the world, and know your options.


Increase your money and finance knowledge from home

Intro to Retirement

Get started early planning for your long term future.

View Course »

Economics 101

Intro to economics. But fun.

View Course »

TurboTax Articles

Deducting Summer Camps and Daycare with the Child and Dependent Care Credit

If you paid a daycare center, babysitter, summer camp, or other care provider to care for a qualifying child under age 13 or a disabled dependent of any age, you may qualify for a tax credit of up to up to 35 percent of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children or dependents.

Video: Who Qualifies for an Affordable Care Act Exemption (Obamacare)?

The Affordable Care Act requires all Americans to have health insurance or pay a tax penalty. But, who qualifies for an Affordable Care Act exemption? Find out more about who qualifies for an exemption from the Affordable Care Act tax penalty, how to claim an exemption on your tax return and how the Affordable Care Act may affect your taxes with this video from TurboTax.

What Is Schedule H: Household Employment Taxes

If you hire people to do work around your house on a regular basis, they might be considered household employees. Being an employer comes with some responsibilities for paying and reporting employment taxes, which includes filing a Schedule H with your federal tax return. But even if you have household employees, filing Schedule H is required only if the total wages you pay them is more than certain threshold amounts specified by federal tax law.

Taxable Income vs. Nontaxable Income: What You Should Know

Knowing what to claim as taxable and nontaxable income can reduce your tax liability. Income can be acquired in many forms, including wages, salaries, interest, tips and commissions. ?Consider all money that increases your wealth as taxable,? advises accountant Caroline Thompson. ?There is very little that is nontaxable. The government specifically lists anything that is not taxable and the circumstances that must exist or occur for it to be non-taxed income,? she adds.

What Are the Tax Penalties for Smokers?

Starting in 2014, the Individual Shared Responsibility provision of the Affordable Care Act made you responsible for having minimum essential coverage, or MEC, in health insurance. Otherwise, you need to be eligible for a health care exemption, or you could pay a penalty when filing your income tax return. This requirement for minimum essential coverage applies to smokers and nonsmokers alike. If you?re not covered by an employer's health plan and are a smoker, you can go to the health care marketplace to find MEC. If you?re still unable to comply, you may have a penalty applied.

Add a Comment

*0 / 3000 Character Maximum