Yes, it’s true. If you forgo traditional employment in favor of the American Dream, you have a higher chance of being noticed by Uncle Sam- and not in a good way.

The Internal Revenue Service has many agendas, but a top one is collecting unpaid taxes from self-employed people. The IRS believes that this group is more likely to underreport income and overclaim expenses, so they have a greater chance of being audited than employees. The IRS wants to crack down on employers who make excess deductions or don’t claim income, and end up catching innocent taxpayers in the process.

The key question is whether the IRS is justified in paying closer attention to freelancers and artists than corporations? Below is an overview of the reasons why your audit risk goes up the moment you start working for yourself.

The Data Suggests some level of Noncompliance

In April 2018, CPA Practice Advisor ran an article suggesting that 32% of self-employed workers admit to underreporting their income. Citing the results of a survey by Quickbooks Self-Employed, it reported that:

• 36% admitted to not paying taxes at all. Of this total, 9% didn’t give a reason except that they “just didn’t pay” while 17% said they didn’t make enough money to owe tax and 10% claimed losses that exceeded their profits. For what it’s worth, they may not have made enough to pay taxes, but this would still raise flags with the IRS.

• 32% of those who were audited made tax errors. These can range from mere math errors to egregious underreporting.

• 6% of self-employed individuals don’t report any of their income.

• 10% of full-time self-employed workers only reported 50% or less of their income.

While some of these discrepancies can be explained by the difficulty of running a profitable business (most small businesses fail within two years), the IRS sees millions of potential tax cheats for it to potentially audit.

There Are More Opportunities for Noncompliance

Regular employees have little to no opportunity to misreport their income, as employers withhold taxes from their pay. You simply don’t have much to hide if your only income is from your paycheck every two weeks. It’s easier for self-employed people, especially those who run a cash-based business, to evade their tax obligations.

If you pay a local handyman to fix your leaking window air conditioner, you probably don’t give them a 1099 form along with the cash or check. The onus is on the handyman to report the income, but the IRS believes that he probably won’t do it. This is why your audit risk goes up if you run a cash-intensive business, such as hair salon, bar, or taxi, or you are part of the ‘gig’ economy, which includes Uber drivers.

Deductions Can Be Abused

One of the advantages of being self-employed is that any tools or assets you use for business purposes can be written off. This includes your car and even part of your rent or mortgage if you maintain a home office. But despite the tax break that the self-employed get under the new law, the IRS knows from experience that some of these workers will still claim excessive deductions.

If you are self-employed, always remember that audits are a real possibility and if one does occur, the IRS can find unclaimed income by checking bank records. They will also investigate deductions that appear excessive, so honesty is always the best policy.

Have You Been Selected for an Audit?

If the IRS sends you a letter indicating that you have been selected for an audit, it’s normal to feel alarmed, even if you’re reasonably sure that you have filed your taxes directly. Self-employment tax returns, especially if they aren’t professionally prepared, can be complicated and you may have made mistakes. It’s also possible that the IRS can take a legitimate gift or reimbursement, mistake it for income, and present you with a tax bill that you don’t really owe.

An IRS audit attorney can help you prevent a catastrophic outcome by dealing with the IRS on your behalf. They will also review your invoices, receipts, and other documents to ensure that each one correctly reflects the transaction. If you know that there are bigger issues with your tax return, such as improper deductions and unreported income, experienced legal counsel is definitely recommended.

Contact a Tax Attorney

If you are self-employed, receiving an audit letter or notice of proposed adjustment from the IRS is especially daunting. At Safeguard Law, PLLC we will help you navigate the audit or review the accuracy of the assessment, look for ways to minimize any tax liability and propose a payment plan for the remaining balance.