When you run your own business from home, you face handling a multitude of responsibilities to make your business successful. One of those is reporting your yearly business expenses and income and ensuring you shield yourself from a potential audit.
However, if you only work your business part-time or make a substantial income while self-employed, you are more likely to trigger an audit. For an example, the IRS audited .69% of returns of individuals who reported less than $25,000 in income in 2018. It also audited 1.10% of returns of those who earned between $500,000 and $1 million.
You also are more likely to face an audit if your tax return includes one of the following red flags:
- Math errors. You should double or triple check you entered your income numbers correctly. You’re also less likely to make errors if you use tax preparation software to complete your return or hire a tax preparer.
- Failing to report income. If you are a consultant, independent contractor or freelancer, you likely have multiple 1099 forms that detail your yearly income. Don’t neglect to review what each of your clients reported for your income and include all of your income in your return.
- Reporting too many losses on Schedule C. You need to be careful about what you report for your deductions. Are you accurately reporting the mileage your car racks up as the result of your business? Have you included too many fancy networking dinners out as part of your deductions? The IRS looks for areas where you might overreport your expenses, comparing with others who file returns and work in a similar field to yours.
- Reporting a home office deduction. The IRS has a narrow definition of when you can claim a home office as part of home office deduction: It must be exclusively and regularly used for your business.
- Using a lot of round numbers in a return. If you earned $2,834 for a web design project, you need to report that as $2,834, not $2,830. If you’re shipping and mailing expenses were $578 for the year, you shouldn’t report them as $580. Too many simple round numbers in your return can make the IRS suspicious that the numbers are accurate.
Reporting and documenting your self-employed income and business deductions can be cumbersome, confusing and difficult. You may want to investigate using apps or accounting software to help track these items, as well as using a tax preparer at tax time. If you do end up facing an IRS audit, you should consult a tax law attorney, to help ensure you aren’t paying more than you truly owe.