You deposited or withdrew over $10,000 in cash:
Depositing or withdrawing over $10,000 in cash attracts attention. Banks are required to notify the IRS.
Depositing or withdrawing $9,950 or $5,000 twice is even worse. This creates a pattern and suspicion that you are purposely evading tax rules. The former can lead to penalties; the latter to possible criminal investigation.
You file schedule C as A sole proprietor:
In my 50 years of defending taxpayers audited by the IRS, about half conducted business as sole proprietors and filed Schedule C. Their audit profiles even increased when gross receipts exceeded $100,000 and their bottom lines showed losses.
You claim home office deductions:
The space that you designate as office at home must be used exclusively and continuously for business activities. In other words, you must use your home office area purely for business. You and your family members cannot do anything else in that space – no TV, no snacks, no social activity. No NBA, MLB, NFL, or Pacquiao fights either.
You run a cash-intensive business:
IRS has identified businesses that receive cash – salons, restaurants, bars, car washes. This also includes downtown produce section where cash seems to be the only mode of transacting business.
I remember representing a taxpayer with a store in downtown Los Angeles produce section. IRS wanted to visit his place of business. As part of my due diligence ritual, I’ve made it a habit of visiting the client’s place of business before field inspection by IRS Revenue Agents. Guess what I noticed – the proprietor’s Ferrari parked just outside the produce store. Whew!
You claim losses from your hobby:
It’s cool to run a business that you truly enjoy, such as photography, dance studio, martial arts, dog-breeding, farming, and other leisurely activities. If you convert that pastime into a regular business, try to make some money; otherwise, you may attract an IRS audit, especially if your new enterprise consistently generates losses. IRS may claim that you have a hobby – an activity not engaged in for profit. Loss from hobby is not deductible.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits.” Readers may email tax questions to email@example.com.