What triggers an IRS audit for self-employed individuals?

Self-employed individuals face higher audit rates than W-2 employees because the IRS knows that Schedule C is a common area of error and underreporting. Understanding the most common audit triggers helps you stay compliant and keep accurate records. **High audit-risk indicators:** 1. **Reporting large losses on Schedule C:** If your business consistently reports losses — especially if you have other significant income — the IRS may question whether you have a profit motive (hobby loss rules, IRC §183) 2. **High expenses as a percentage of income:** Unusually high expense ratios compared to industry norms can flag your return 3. **Claiming 100% business use of a vehicle:** The IRS is sceptical of anyone claiming a vehicle is used 100% for business with zero personal use 4. **Rounding all numbers:** Taxes should have precise amounts — all round numbers ($3,000, $10,000) suggest estimates rather than records 5. **Home office deductions:** Frequently audited — ensure strict exclusive use 6. **Large charitable deductions:** If itemising, large charitable gifts relative to income attract scrutiny 7. **Cash businesses:** Restaurants, landscaping, cleaning, etc. where cash income is hard to verify **What the IRS can request in an audit:** - Bank statements - Mileage logs - Receipts for every claimed deduction - Contracts with clients - Home office floor plan and photos **Audit representation:** You have the right to have a CPA or tax attorney represent you in an audit — you do not need to meet with the IRS alone.

• Consistent Schedule C losses trigger IRS hobby loss scrutiny (3-of-5-years profit test)
• 100% vehicle business use is a major red flag — keep a mileage log
• Unusually high expense ratios relative to income attract attention
• All expenses should have documentation — round numbers without receipts are risky
• You have the right to CPA or attorney representation in any IRS audit