The Chances of an Audit When Filing a Schedule C
The chances of a taxpayer being audited by the IRS are extremely small. Only 1 percent of individuals with incomes less than $200,000 are audited annually. Filing a Schedule C, however, will more than double your audit risk.
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Targeting
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The IRS uses a computer program called the Discriminant Inventory Function System to target certain returns for closer scrutiny. Although the system is not available publicly, an analysis of the audit percentages by category the IRS publishes every year has indicated a list of red flags in the system that seem to increase an individual's chances of being audited.
Rationale
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The IRS knows that self-employed individuals who file a Schedule C, Profit or Loss From Business, have more of an opportunity to co-mingle business and personal expenses or to incorrectly treat personal expenses as business expenses in an attempt to hide income. There is also the tendency of people with full-time jobs to attempt to treat hobbies as Schedule C businesses, carrying losses year-to-year in an attempt to shelter an individual's main income.
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Percentage Increase
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Although audit percentages change from year-to-year, the Schedule C has had more than a decade with more than double the risk of audit, as compared to individual returns without a Schedule C and the business returns of other types of entities. In 2009, the chances of an audit when filing a Schedule C reporting income under $100,000 was 1.9 percent and income from $100,000 to $200,000 was 4.2 percent.
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References
Resources
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