IRS Audits Frequently Focus on Freelancers

For years, the American marketplace has been evolving toward a workforce in which more and more people are not traditional employees. The ranks of contractors, freelancers, consultants and assorted vendors have grown for many reasons, and the downsizing unleashed by the Great Recession only accelerated this trend.

There are many unintended side effects to this transition. One of them, it seems, is an increased risk of IRS audits. The evidence indicates that self-employed people get audited more by the IRS than old-style employees.

This affects a lot of people. A recent survey by the temporary employment firm Kelly Services showed that the number of employees who describe themselves as “free agents” is on the rise. It has increased from 26 percent of employees to over 40 percent of employees in just the last three years.

All this freelancing translates into a lot of tax returns. In 2010, 23 million taxpayers filed Schedule C, which sole proprietors (including various freelancers) use to report profit or loss from a business that is not incorporated.

The chances of such returns being audited are at least twice as large as those for a corporation, according to Keith Hall, who is a tax adviser for the National Association for the Self-Employed. And the chances are more like three times as much once very small businesses with less than $25,000 in gross receipts are excluded.

Hall believes the IRS targets small business owners for audits compared to corporations. He was audited himself twice, he told Reuters – even though he didn’t owe any additional tax either time.

Source: “Freelance? An IRS audit may be in your future,” Reuters, 2-28-12