By / Tax Propaganda

Are Self-Employed Individuals’ Chances of Being Audited Higher?

The Fear of an Audit

Nobody wants to receive that dreaded letter from the IRS. If you’re self-employed, you may have heard that your chances of being audited are higher. Is that true? Unfortunately, yes. The IRS tends to scrutinize self-employed individuals more closely. But why? And what can you do to protect yourself? Let’s break it down.

Why Are Self-Employed Individuals at Higher Risk?

When you’re self-employed, the IRS assumes there’s a greater chance of unreported income or inaccurate deductions. Unlike W-2 employees, self-employed individuals don’t have taxes automatically withheld, making it easier to underreport earnings. Additionally, the IRS pays close attention to deductions, such as home office expenses, travel, and meals. While these can be legitimate, excessive claims can raise red flags. Large income swings from year to year may also trigger suspicion, as they could indicate inconsistencies in reporting. Furthermore, if your clients issue 1099 forms, the IRS expects your reported income to match. Any discrepancies may prompt further scrutiny.

Common Audit Triggers You Should Avoid

Certain actions make the IRS more likely to take a deeper look at your return. Some of the biggest triggers include:
  • Claiming excessive deductions compared to others in your industry.
  • Failing to report all sources of income, especially cash payments.
  • Deducting 100% of a vehicle’s use as a business expense without proper records.
  • Using rounded numbers instead of exact amounts on tax returns.
  • Having a high ratio of deductions to income, which seems disproportionate.

How to Reduce Your Audit Risk

While you can’t eliminate the chances of being audited, you can lower the risk by:
  • Keeping meticulous records – Save all receipts, invoices, and financial statements.
  • Being honest and accurate – Report all income and avoid exaggerating deductions.
  • Separating business and personal finances – Use a dedicated business bank account and credit card.
  • Working with a tax professional – A CPA or tax attorney can help ensure compliance and avoid red flags.

What If the IRS Comes Knocking?

First, don’t panic. Audits don’t always mean wrongdoing. If the IRS contacts you, start by gathering all documentation to support your deductions and income. Make sure to respond promptly and professionally to any IRS requests, as delays can complicate the process. If things become too complex, consider hiring a tax professional or attorney to guide you through the audit and ensure you are fully prepared.

Stay Alert and Get Expert Help

Yes, self-employed individuals face a higher risk of audits, but careful bookkeeping and professional guidance can help you stay compliant. If you’re worried about an audit or need help with tax issues, don’t wait—get expert advice from Laura Brown before problems arise.