As tax relief attorneys, we frequently get the question, “How likely is it that I will be audited?” or “Does the IRS audit people randomly?”
IRS audits are not completely random. You may have heard that the self-employed are a more common target than wage-earners. This is true. Income reported on a Schedule C is, according to some, one of the most likely types of returns (or parts of returns) to be audited. According to Forbes columnist, Robert Wood, the sole proprietorship is one of the most tempting targets for the IRS. Formation of a legal entity like a partnership or a corporation may add complexity to your business, but it is not as routinely audited as the sole proprietorship.
According to the IRS, cases are selected for audit based on a variety of factors, including statistical formula, document matching, and related examinations.
Nobody can audit-proof your return. There is always a chance that the IRS will scrutinize your income and your business filings. But there are certainly steps that can be taken to reduce the likelihood of an audit. One of those steps is to simply avoid filing as a sole prop.