To tax professionals: If you filed a fraudulant schedule C how would the IRS ever find out?

Question

What are the chances of getting audited if you only make around 50K a year

Answer 1

There are at least three methods the IRS use:

1. They track income through information reports. If your business is subject to 1099 information return reporting the IRS will compare your income to what other businesses report paying you. If you report less... then you're caught.

2. The IRS has statistical figures for other business in the same industry. They compare your reported income and expenses with the income and expense of "like businesses" to see if you are within "normal" guidelines. This is called a DIF audit. (Discriminate Function System) For instance, if you are in the retail flower business and report cost of goods sold as 89% and the average cost of good sold in the retail flower business is only 65% then their computers will catch the discrepancy and you have an increased chance of an audit.

About 75% of the audits performed are DIF audits. Therefore, if you "guess wrong" on expenses as compared to their statistical model for your type of business you increase your chances of an audit substantially.

3. The IRS performs compliance audits. These are TCMP audits (Taxpayer Compliance Measurement Program) These are miserable audits as the taxpayer is required to substantiate virtually every number on the tax return. I believe that the IRS has suspended doing these audits for the time being... but with the IRS there is always the possibility of reinstatement.

Your biggest fear should be the DIF audit. Self-emplopyed individuals are under the IRS radar because they historically under report income. When you combine that scrutinity with the possibility of hitting a DIF flag because your reported information falls outside of the "norm" then you have substantially increased your chance of audit.

If you are audited for any reason the IRS may include the schedule C as a subject of audit. If you do not have adequate records to verify your income and expenses... you're toast.

Answer 2

It would be uncovered in an IRS audit. Schedule C filers increase their chances of being audited by about 2%. If the schedule C shows a loss, those chances increase quite a bit (8% to 10%, maybe more).

The IRS would also catch it if people issued you 1099's reporting what they paid you and your total revenue was less than the reported amount.

Answer 3

If you padded your expenses, you could lose all but your most documented expenses, resulting in a large tax bill and penalties. With unreported income, your biggest risk is fraud and owing taxes on income that left a trail.
Even if the IRS does not audit you, someone could report you and cause the IRS to investigate you.

Answer 4

Chances of being audited are slim and if you did a smart job of it (and the IRS didn't get 1098's or something from another source that conflicted with what you filed) its unlikely the IRS would find out. Still is it really worth going to jail over even if the chance of going to jail is so slim.

Answer 5

Maybe they'd find out, maybe they wouldn't. There are a lot of ways they could, including random audits. If you get caught, then you could be in major trouble, not just for that year, but for other years.

So it comes down to "tell me, do you feel lucky".

Answer 6

a HUGE tip off to the irs is that you used schedule C at all.

if you filed it with your return just know that you're already under closer scrutiny than someone who didn't.

your salary has nothing to do with being audited.

DON'T CHEAT THE TAX MAN

Answer 7

the big A---audit! however if you have receipts that document the hows and whys of expenses it will be difficult to disprove them. keep both written and computer records to make sure all is on the up and up as well as documenting mileage...