The self-employed are at higher risk of audit

Tax lawyers will tell you the IRS is more likely to audit a self-employed taxpayer filing a Schedule C, than a W-2 wage earner. These tax attorneys explain that the IRS doesn’t trust self-employed taxpayers as the agency is concerned these entrepreneurs are more likely to try to under-report income and/or write off personal expenses as business deductions.

So if you are a self-employed business-owner, what can you do to avoid an IRS audit, or in the alternative, what can be done to make an audit as painless as possible? IRS tax attorneys suggest one thing you may do to help avoid trouble is use professional software programs like Quickbooks, Quicken or Peachtree, to help track your income and expenses.

Tax attorneys also warn self-employed taxpayers to avoid red flags issues, and to be prepared to address any red flags with appropriate documentation if they arise. While self-employed taxpayers are entitled to claim “ordinary and necessary business expenses,” some expenses will receive heightened scrutiny.

According to most tax attorneys the IRS loves to investigate auto expenses and requires you to maintain a log of business related travel. Also, these same tax lawyers suggest that if you keep an appointment book or calendar, you save it along with you mileage log for any possible audit. Auto repair bills will also be helpful as they record mileage on specific dates, which tends to verify the mileage you are reporting on your log.

Other red flags for the agency include deductions for meals and entertainment expenses. Tax attorneys say that because of a dramatic increase in the number of self-employed taxpayers working from home, home office business expenses have also become another favorite area of IRS scrutiny.

According to several tax lawyers who represent self-employed business-owners, if you work from home you should consider taking pictures of your home to illustrate to the IRS during an audit that the work space is segregated from your personal living area. These tax attorneys also remind self-employed business-owners that if you are claiming home office business expenses, you must be able to demonstrate to the IRS your home office is your principle place of business.

While it may sound like a no brainer, tax lawyers also recommend you document all sources of income and use a professional to prepare your returns. Another suggestion is for self-employed sole proprietors to consider changing the type of business entity they are using to do business. Tax attorneys point out corporations, partnerships and L.L.C.’s are less likely to be audited.

If you are a self-employed business owner and want to avoid an audit, or be well-prepared if you are audited, you are encourage to get advice from a competent tax lawyer or other tax professional. In the long run, managing your tax liabilities through adequate preparation and documentation could end-up saving you a lot of money and headaches.


Segal, Cohen & Landis
9100 Wilshire Blvd., Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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