Schedule C as an IRS Red Flag
Schedule C is an attachment to your personal tax return to report business income and expenses. Most often it is used for reporting small, side businesses, such as for a homemaker that also sells makeup, or an office worker that also does lawn care. There are no limits, though, and it can be used for much larger, full-time business activities. (I’ve seen it used for a sales business that exceeded $1 million a year in gross revenues!)
Because Schedule C is (at least compared to the corporate and partnership returns) an easy business return, and because taxpayers have abused it in the past by reporting hobbies as businesses and other inappropriate business expenses, the schedule is viewed by some as a red flag for the IRS.
Put simply, the IRS “red flags” are so-called because of an increased likelihood of an audit, and the increased likelihood of an audit most often comes because of previous abuses by taxpayers.
There is nothing wrong with filing Schedule C. Often it is the most efficient and effective way to report business activity, and I have no concern about reporting an activity on Schedule C. While the overall odds of being selected for an audit are pretty low, being selected can happen to anyone. The key is to ensure that everything is in place to be able to successfully defend yourself, just in case. If you maintain proper documentation, you should be able to sail through an audit with flying colors.
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