Red Flags For Self-Employed That Could Result To Tax Audit
Having your own business can be luxurious and exciting but it can also catch the attention of the audit division of the Internal Revenue System. This is why it is recommended that tax audit insurance should be availed for protection. In 2016, only 0.70 per cent of individual returns have been audited by the IRS because they do not have enough funding and their personnel are not enough.
The chance of being audited goes up when a self-employed file for a Schedule C which is needed when reporting either profit or loss. This is where most self-employed are getting tax deductions. This is also a pot of gold for IRS agents because they have been numerous cases wherein self-employed individuals are filing excessive deductions yet they do not include their total income.
The IRS agents will be suspicious if there are big deductions spent on travel, restaurants or accommodations. For deductions, detailed information should be recorded such as the purpose of business, the number of people in attendance, the location and amount. For accommodations, if the amount is more than $75 then the receipt should be kept. The absence of proper documentation can result to an audit.
There is a higher chance of being audited if you are earning more. This does not mean that you did something wrong but it is a warning not to be surprised if the IRS take a look at your earnings and question it. This is one of the reasons why millionaires are being targeted by the tax audits.
If making too much money through your business can be a red flag, earning too little is also not good. You will not be honoured for a deduction if your business is not earning well. In order for your business to be considered in good standing, you must profit at least three out of five years.
Do not claim that you vehicle is solely used for business purposes alone because it can raise a red flag, more so if you only have one vehicle in your possession.This is why it is important to have tax audit insurance if you are unemployed because you never know when the IRS might unexpected look at your tax return.