quote:Originally posted by cassandravert:
I'm told that when the IRS looks for audit candidates, it does a cross section of similar businesses and looks for the ones that stick out as different.
Put another way, the IRS will see that all ebay sellers are making slim profits, so that by itself will not be a red flag to audit.
Here is the skinny from Forbes regarding an audit.
Here's the big implication: If the IRS sees a credit card or Paypal 1099 issued for an individual who has filed a tax return that doesn't include a Schedule C (Net Profit From Business-Sole Proprietorship) or includes one showing too little in sales, or to a business reporting too little in sales, the agency might target the recipient for an audit. If an audit target fails to produce acceptable documentation of his or her business proceeds and expenses, the IRS might well include all the revenue reported on the 1099s, disallow any undocumented business expenses and then assess taxes, interest and possibly penalties on profits a taxpayer didn't even have.
(Here's the link to the whole article.)