Sch C Audits

[diligentbiz]

Wondered how many of you are going through IRS Sch C client audits. What are they looking for and best way to respond?

[redux]

Wondered how many of you are going through IRS Sch C client audits. What are they looking for and best way to respond?

None yet, thank you very much!

[Lion EA]

Had a long-running (auditor was hospitalized and replaced with someone in another city) Schedule C audit that client finally accepted IRS results. He'd had years of losses, and the IRS ruled "hobby." They wanted to see everything: receipts, canceled checks, where his money came from to pump into this activity running at a loss (inherited his father's investment account, so asked for statements), etc.; however, it was clear they really had made up their mind that it was a hobby and what direction they were heading from the beginning. They asked for written rebuttal on the nine points of business vs. hobby. We spent most of our time on that, writing and researching and applying to his business. I've heard from others that Schedules C, E, and F are the IRS's focus lately.

[Porat]

Wondered how many of you are going through IRS Sch C client audits. What are they looking for and best way to respond?

IRS auditors look at large and unusal items on the return, including Sch. C. If you have payroll, they will do a package audit and check payroll. If not, they will ask about 1099 vendors. Inventories , if you have them. Travel and entertainement is always a look at item. Automobile expense will be looked at if it is a high dollar amount.

[diligentbiz]

Thank you! No large or unusual items, hadn't thought about "hobby", but examination request is slanted in that direction; I'll be prepared. I sincerely appreciate your replies.

[TAXBILLY]

Had only one Schedule C audit last year and they were mainly concerned with the auto mileage log which was lucky for me because they picked the one of not many of my clients that happened to be diligent in this area.

taxbilly

[diligentbiz]

Audit's concluded, status 0/0. Auditor commented return wouldn't have been pulled if non-taxable social security had been shown on the form. So in the future, I'll force the entry to avoid audit. Focus was "unreported income"....first thing I did was flash the SS statements attached to the client-copy return ; ) Although the orig. return included a statement listing items in "Sch. C, Other Income", it must have been ignored because auditor concluded "$11" biz bank interest unreported (it was). Does this leave a door open for another audit in the future if I don't clarify this issue?

[joanmcq]

the biz account interest isn't supposed to be on the Sch C; its on the B, or just on line 8.

[D Eckerman]

my 2 were same office but different auditors

Every single receipt to back up the Sch C! All in order, all added up.

COMPLETE mileage log - when, where, why, reason, time, date, etc!

Income for one as it was low and a loss... therefore is negating expenses

other - income was good but still a loss due to sec 179 - wife had high income and took a second look at the site and queried all the equipment use.

Both ignored pretty much everything and expect it to go to appeals

[diligentbiz]

the biz account interest isn't supposed to be on the Sch C; its on the B, or just on line 8.

I've always reported Biz Acct Interest on Sch C. No auditor has complained because it's reasonable to keep with the biz (quote me) "the added 'Other Income' could change the tax liability". NASE agrees - See "Schedule C from A to Z" http://news.nase.org/nase_about/schedulec/F_Lines1_7.asp stating

LINE 6 Other Income

On this line report other types of income you received from your trade or business. Don’t include on this line any income from the sales of your product or services.

Items of income to include here:

Interest on business cash, such as checking or savings accounts.

Interest on business investment accounts (but no retirement accounts).

Bad debts that you deducted in a previous year, but for which you received money this year. There are called “Bad debt recoveries” and should be reported here.

Prizes and awards in connection with your business. For example, your business entered a raffle through the chamber of commerce and won a $500 gift certificate. Report the $500 on line 6.

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With due respect to all, I hope this clarifies where to report.

[TAXBILLY]

Agree with diligentbiz.

taxbilly