Taxpayers use the Schedule C form to report profits or losses for a business. The majority of taxpayers who use this form are self-employed, either through freelance work, gig jobs, or other work where they're the sole proprietor.

While the form may appear straightforward, filing a Schedule C makes a taxpayer more likely to be audited. Certain information can act as red flags that make it more likely a taxpayer will be audited. 

High Earners

Individuals who earn more than $1 million annually are more likely to be audited. While there's no way to avoid this red flag, high-income earners should ensure their Schedule C forms are double-checked to avoid other red flags or issues.

Excessive Deductions

All businesses can deduct certain expenses. The problem occurs when these deductions are excessive. Taxpayers should make sure that any deductions are ordinary and expected within their work. 

For those who work from home, office deductions can be especially challenging. To qualify as a deduction, a space must be used exclusively as an office. For example, a taxpayer who uses a small corner of a 500-square-foot family room cannot claim the whole living room as an office deduction. 

Math Errors

Inputting the wrong number or adding the wrong amounts increases the likelihood of an audit. Check all forms before submitting as an error on a tax return may raise concerns about problems with a taxpayer's other financial statements.

Significant Changes

Drastic year-to-year changes in income or expenses may raise a red flag. Similar to high earners, taxpayers may not have any control over a dramatic increase or decrease in their income on expenses. Taxpayers who see large shifts in income should be extra diligent in their recordkeeping.

Unending Business Losses

All businesses have down years. What's a red flag is when a business has losses every single tax year. After all, if a business is constantly seeing losses, it invites the question of why the business is still in business.

Green Flags

One of the challenges with Schedule C is that it's deceptively simple. An experienced tax professional can help taxpayers avoid red flags and minimize their chances of an audit. If you file a Schedule C form or if you're now facing a Schedule C audit, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.