Why the Self-Employed Are Audit Targets
The IRS keeps a close eye on self-employed individuals. Here's what it looks for.
The IRS claims that most tax cheats are in the ranks of the self-employed, so it is not surprising that the IRS scrutinizes this group closely. As a result, the self-employed are more likely to get audited than regular employees. If you are self-employed, stick to these two rules, at a minimum, to avoid trouble in case you are audited: Claim all of your income, and don't take deductions for items you didn't have to pay for.
If you are self-employed and the IRS chooses to come after you by way of a tax audit -- or, worse, a criminal investigation -- be aware that the agency can obtain your bank records and other financial records. If you've been foolish enough to deposit unreported income in your bank accounts, an IRS auditor may find out.
What the IRS Will Want to Know
If you are investigated, expect the IRS to ask the following questions or look into the following issues:
- Did you report all of your business sales and receipts?
- Does your lifestyle appear to exceed the amount of self-employment income you reported?
- Did you report all cash transactions -- especially large cash transactions?
- Did you deduct any personal living expenses as business or home office expenses?
- Did you write off automobile expenses for travel that was not business-related?
- Did you claim large business entertainment expenses?
- Did you make the proper payroll tax deposits?
- Are your workers wrongly classified as independent contractors when they are really employees?
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