Which Business Entity Has The Highest Chance Of An IRS Audit?

If you said “Sole Proprietorship,” you’re correct. The IRS targets self-employed individuals who file a Schedule C far more frequently than employees collecting a salary, because the IRS believes there’s a much greater opportunity for these taxpayers to conceal income or manufacture deductions. Schedule C businesses that report losses are typically targeted by the IRS, so if you’re self-employed, make sure you can prove profit motive and have documentation to support it.  If the IRS believes that you’re not serious about your business, they can classify it as a “hobby,” where your expenses are allowable only to the extent of the income.

The most audited  expenses in the Schedule C form are Auto expenses and Meals & Entertainment expenses.  I cannot stress enough the importance of keeping a daily mileage log listing the date, beginning/ending odometer readings, location, business purpose and client.  Meals, entertainment and gifts are also hot IRS buttons because many taxpayers fail to adequately document the business purposes of these expenses. You must demonstrate that you engaged in business with the person during the entertainment period and that you had more than a general expectation at getting business at some future time. Meals and golf generally provide time and opportunity for a business relationship, while a rock concert or a NASCAR event would not. Document the meals and entertainment event as much as possible. Adequate records include an account book, diary, log, statement of expenses, trip sheets or similar records. Documentary evidence includes receipts, cancelled checks, invoices and bills. If you get audited and cannot prove the expense, the IRS will disallow your deduction.

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