The chances are very low if you don’t have a red flag. But if, for instance, you are a W-2 employee who makes 50K per year and you show 30k of Schedule C losses, your chances of being audited are almost 100%.

It’s cool.

Sadly, there are professionals who do recommend courses of action just to increase their fees.

Thanks for the comments and I hope you subscribe to my feed.

I did not mean to do that, but I can see after reading (putting thy foot in the mouth) I came across that way.

Jeff Day

Incorporating reduces a self-employed taxpayer’s chances of being audited, it does not eliminate them.

It’s true that if you are audited and all of your deductions are legitimate you won’t owe anything to the IRS, but when we are talking about audit red flags the idea is not to get audited in the first place.

I don’t advise my clients to incorporate so I can get an additional $600 or $700 in fees.

I get triple that if my client is audited. Consequently, if I wanted to fatten my own wallet, I would advise them to do things that would increase, not decrease, their chances of being audited.

And I certainly wouldn’t have written this post.

She decided to stay at home and babysit 3 small children instead. Her income from the babysitting is aproximately the same as working for slave labor at the “gas station”. Her rent on her apartment did not change a single dollar. Her utilities did not change virtually at all.

The question in play, is she “required” to allocate a percentage of the rental expenses to against the income? Although they were absolutely no different after daycare than before? Just because a middle income family is allowed to take the deduction on their mortgage when it didn’t change, she is required to “required” to take the rent?

I say there is no daycare expense concerning the rental. Only the food purchases for the children not paid by either the state or the parents.

Let’s pretend that instead of her being a daycare operator, she took up a rural newpaper carrier. We really do have those in the midwest. Her expenses to drive the route are virtually unchanged from driving to the gas station. She uses no more gasoline and doesn’t drive any more miles than she did. She still has the same “old clunker” carrying the still minimum state required liability insurance that she already did. Is she required to take a standard mileage deduction? Is she required instead to take an actual mileage expenses and keep gasoline receipts for the mileage of the route only?

I maintain she does not have any auto expenses for the paper route and would not have any rental expenses.

I maintain because she decides to stay at home and be there for her child she should not have negative consequences on tax return.

Jeff Day EA
Evansville, IN

You State: “The mere reporting of businesses operations on Schedule C rather than a separate corporate tax return increases a taxpayer’s chances of being audited 50 fold.”

I have seen on way too many times that a “CPA” got taxpayers to set up S-Corp etc, using above as reasons in of itself to do so. If the expenses/deductions are legitimate, they are legitimate. Period. And is it just a coincidence that the CPA failed to mention by setting up the new entity the taxpayer’s bill to him would go up by at least $600 per year? I wonder if the author of this article mentions to it’s clients when discussing: “now you do realize this will necessitate a very large increase in my fees do you not?”

Mr Flach wrote: “Does not the IRS require that one file a correct return and claim all deductions to which one is entitled?”

I have been to several nationwide forums with the IRS and have had many discussion concerning this “requirement” which in my opinion is a bunch of over-played crap. I have represented many taxpayers in audits. I can assure that I have never had an audit (sometimes going into appeals) that did not ultimately end up where I thought it should. Sometimes I have been @ the forums and preparers argue they only give the absolute minimum information required. I disagree, I think it is my responsibility to help the auditor arrive at the correct tax return, not the least they can get by with.

But going back to Mr Flach’s remark, if it is my responsibility to help a taxpayer stay within the regs to take a deduction, it is my responsibility to help a taxpayer make it where he could not be required to take a deduction if it is in his best interests to not take the deduction. eg. a single parent taxpayer has an office in the home and makes about $50k we tell the taxpayer they can not utilize the office area for any other purposes, that means none. But on the other hand if the single parent’s income is aproximately $15k don’t I have a responsibility to advise they don’t use that space exclusively so they can’t take the deduction and let the earned income credit pay the self employment taxes, since there won’t be any income taxes anywhichways?

I am making a second comment, concerning taking the decutions when required and would appreciate any feedback

Jeff Day EA
Evansville, IN

If you are audited once chances are you will be audited again – even if no change.

Pete-

Confused – are you saying it is better to pay more tax than necessary and not file a “perfect” and correct return than to risk a rare chance of being audited?

Does not the IRS require that one file a correct return and claim all deductions to which one is entitled?

TWTP

Thank you for visiting and commenting.

I agree.

If your returns are legitimate and well-documented, you should come out of an IRS audit unscathed.

However, even if there are no negative adjustments, the process itself is stressful, time-consuming and costly.

In short, even if you’re tax return is perfect, you don’t want to be audited.