| How to Avoid a Tax Audit for Sole Proprietorships
IRS has found that taxpayers with Schedule C filers have been both overstating expenses and understating income. Here are some the areas that have been typically sited as overstating expenses, and the IRS has specially targeted these for audits
1. Taxpayer has included personal telephone and cell phone calls on his or her Schedule C.
2. Taxpayer has included personal home and life insurance as part of business insurance expense on his or her Schedule C.
3. Taxpayer has expensed his or her spouses travel expense even though she was not actively involved in the Schedule C business.
4. Taxpayers deducted non-business related expense (personal non-deductible) on his or her Schedule C.
5. Taxpayer’s Schedule C activity looking more like a hobby than a profit activity, that was generating continuous losses for more than 3-5 years with no prospect of generating a profit in the foreseeable future.
6. Taxpayer was attempting to deduct entire startup expenses in first year of the business operation, without observing IRS code section regarding capitalization of initial startup expenses and organization expenses.
7. Taxpayer deducted entire auto lease expenses without consideration of personal usage of the auto. This personal usage should not be expensed on Schedule C.
8. Taxpayer has claimed excessive meals and entertainment expenses on his or her Schedule C, whereas in reality he was simply dining his or her spouse and family!
9. Taxpayer was co-mingling his business account with on his or her personal account and depositing sales into his personal account thereby understating sales revenue.
10. Taxpayer claiming office expense for furniture and equipment that were used exclusively in his home. The most common example sited is Computers expensed on the Schedule C, but were never used in the business nor placed in the physical business location. | 
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