Is this a red flag?

[MomIsWorried]

What is the name of your state? Ohio

My husband started a construction business several years ago. We have shown a profit every year (some years smaller than others)...but last year (2005) we lost our @sses (close to a $10,000 loss). Hubby has decided to close the business.

Is showing such a big loss, after years of showing a profit, going to be a red flag for the IRS?

 

[dallas702]

Depends on how many years, and how much of the expenses/profit was written off against the business or other income during those years. A legitimate business that paid taxes on its income for at least 3 years (I think), then goes belly up and quits isn't going to be a red flag. You need to be a little more specific.

 

[dallas702]

Depends on how many years, and how much of the profit was written off against the business or other income during those years. A legitimate business that paid taxes on its income for at least 3 years (I think), then goes belly up and quits isn't going to be a red flag. You need to be a little more specific.

Just a question, though. How did your construction business go bad during the best year for construction in our history? Are you in the Katrina zone?

 

[Snipes5]

I had an audit this summer, it just so happens that the Sch C examination center is located somewhat near here. Losses are a red flag, but on the audit I had, the income and losses were both in six figures.

Snipes

 

[dallas702]

I had an audit this summer, it just so happens that the Sch C examination center is located somewhat near here. Losses are a red flag, but on the audit I had, the income and losses were both in six figures.

Snipes

So, did they sic their dogs on you?

 

[Snipes5]

Actually no. I supplied the nice auditor with the taxpayer's records, some of which were in the Taxpayer's favor, and some which were in the IRS' favor, and the issue was resolved to the satisfaction of both the taxpayer and the IRS.

Snipes

 

[dallas702]

Good for you! Sometimes you get a break. I had two occassions to sit with auditors quite a few years ago. The first was for a client (simple 1040, question about a deduction that amounted to less than $100 difference in tax), and my own 1040 with another less than $100 challenge. After wasting over two hours each time each was declared a "wash" (as they put it). I didn't want to "Nya nya" them, but there were no mistakes in the first place. I just don't get these guys. They wasted my time, my client's time, the taxpayer's time, and their time. Then, years later I found out they had been "reviewing" my returns for almost 20 years....even my military years and simple 1040A years. Like I said, I just don't get 'em.

 

[Snipes5]

I don't think they do that anymore... most of the time if the amount isn't much, the IRS won't issue a change as a result of the audit.

In my case, it was taxpayer error, they got them fair and square. The rules are plain, and I found the auditor to be fair and reasonable.

Snipes