Could this raise a red flag?

[AZ-Tax]

Client has a Sch C business but approx $500 in gross income with about $5000 of exps. Those exps were related to exps the client had hiring her adult daughter that does not reside with the client. The Client is single so no other source of income and lived off savings. This is the only income (1099-misc) for the daughter which will trigger EIC.

Your thoughts?

[spanel]

Why would I hire someone for $5,000 to only make $500?

I have a ditch to dig for $500, so I'll hire my daughter to do it for $5,000.


Yes, it sounds fishy.


Chris

[DMICPA]

1099

Let's see.

Client may not be in business seriously. If client continues in business and makes a profit in future years, that would help. Often times in the first year, a lot of expenses are possible and the business may not be profitable but there could be a problem with currently expensing verses amortizing start up costs.

Uses a related party for the operation. Is it possible the IRS could reclassify the daughter as an employee? How could she be outside labor in such a business setting?

1099 triggers EIC. This is an area subject to careful scrutiny by the government as it has been an area of non compliance.

Yes, a red flag is possible.

[ChEAr$]

Not JUST a red flag, AZ, but this is out and out F R A U D, and I wouldn't touch that return
with such a schedule c with a ten foot pole.