12 IRS Audit Red Flags for the Self-Employed

If you are self-employed, minimize the odds of the IRS giving your tax return a second look by avoiding these audit red flags.

1040 under magnifying glass
(Image credit: Getty Images)

Being in business for yourself can be exciting, lucrative – and a great way to draw the attention of the IRS's audit division. The IRS has audited significantly less than 1% of all individual returns in recent years, so most taxpayers can rest easy. But if you file a Schedule C to report profit or loss from a business, your odds of drawing additional IRS scrutiny go up.

Schedule C is a treasure trove of tax deductions for self-employed people. And it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don't report all their income. The IRS looks at both higher-grossing sole proprietorships and smaller ones. Special scrutiny is given to cash-intensive businesses, highly profitable companies, and small-business owners whose Schedule C's report a substantial net loss (especially if those losses offset in whole or in part other income reported on the return, such as wages or investment income).

You might be aware that the Inflation Reduction Act, passed last year, gives the IRS $80 billion in extra funds over 10 years, with a large chunk of that money to be used by the IRS for increased enforcement activities. Increased audits won’t happen overnight. It will take the IRS time to hire examiners and to train them to audit complicated tax returns. Most of the enforcement effects from the IRS’s $80 billion windfall won’t be felt by taxpayers for at least a couple of years. But you’ll still want to be ready for any IRS audit onslaught because the return you file this year might be snagged up for exam in 2024 or early 2025.

If you want to avoid the wrath of IRS auditors, look at these 12 audit red flags for the self-employed. Doing so now could save you a lot of time and money down the road. 

Joy Taylor
Editor, The Kiplinger Tax Letter

Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to kiplinger.com and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.