I.R.S. Audit Red Flags And The Self-Employed

Posted on: 23 July 2015


Self-employment carries many perks; no commute or work wardrobe to worry about and an enormous amount of flexibility when it comes to setting your own hours. However, this freedom and flexibility comes with greater financial record-keeping responsibilities. Failure to properly document your cash flow can make you the target of an I.R.S. audit. Read on for what the I.R.S. looks for and how to plan ahead for the possibility of an audit.

Red Flags

Cash Business: If the nature of your business calls for a lot of cash to change hands, expect more scrutiny and be prepared to show documentation of your transactions. For example, if you run a daycare out of your home and some parents pay you with cash, make sure that you enter the transaction into your bookkeeping system and give out a receipt with a carbon to keep for proof. Keep all bank deposit slips as well.

Automobile Use: Many people use their vehicles for both personal and business reasons. If you do, make sure that you keep mileage records to separate the two uses. You can find mileage tracking apps for your smartphone that make it easy to remember to notate the trip, but jotting down the beginning and ending mileage for each business-related trip works just as well. For the truly time-pressed, take a quick photo of your car mileage with your phone.

Travel and Entertainment: If you must travel for business, keep records not just of your hotel, car and restaurant bills and receipts, but of the reasons for that expense. You must be able to show the I.R.S. that the expense was really business-related. For example, if you want to include a restaurant meal, notate that you took a potential client out for lunch or that you had coffee with your web designer to discuss changes to your web platform.

Your Lifestyle: If you are reporting a profit of $30,000.00 on your Schedule C, but are living in a villa on the beach, you may have some explaining to do. I.R.S auditors are not only trained to comb through your financial records, but to also observe your home, car, clothing and jewelry for signs that you are hiding income. While looking rich alone is not a reason for an audit, it may signal the auditor to look deeper into your records. 

If the I.R.S. finds enough red flags, you may be audited. If so, make sure that you get your records organized and be ready to comply with all document requests from the auditor. If you have a complicated financial situation, you may need the assistance of a business law or tax attorney. For more information, contact Souders Law Group or a similar firm.